Operates a major hydropower dam

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“Dams ‘R’ Us” operates a major hydropower dam on the Klamath River in Oregon. In the event of dam failure, there would be major damages to local communities. The company can reduce the probability of failure through proper maintenance of the facility. The marginal cost of maintenance is increasing in the amount of maintenance done (and thus decreasing in the probability of an accident). We can write this marginal cost curve as MC=2000-2250*p (where 0<p<1). The marginal expected damages are an increasing function of the probability of an accident so that MD=3000+500p. Provide a graph or graphs to illustrate your analysis/answers to the following questions. What is the efficient probability of dam failure? IIf “Dams ‘R’ Us” thinks that, in the event of dam failure, they will NOT be found liable for damages, what probability of failure will they choose?

Reference no: EM13741717

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