Problem
Suppose that there are two consumers who derive benefits from consuming one unit of a dangerous product. Consumer A derives total benefits of $200; consumer B derives total benefits of $100. The risk of an accident from consuming the product is .01, and the damages from an accident are $5,000. Finally, the firm's cost of producing the product is constant at $75 per unit.
(a) Is it efficient for the firm to produce and sell the product to consumer A? What about consumer B?
(b) Suppose that both consumers (and the firm) correctly perceive the risk of an accident. What is the price of the product, and which consumer(s) purchase it under a rule of no liability? Under strict liability? Which rule (or rules) yields the efficient outcome? (Assume the firm is competitive and sets the price equal to its full expected cost per unit.)
(c) Now suppose that both consumers misperceive the risk of an accident to be .001. How does this change your answer to (b)? (Assume the firm continues to perceive the risk correctly.)
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.