Marty, a musician, frequently plays at large parties and nightclubs. Marty has musical equipment worth $8,000, and he takes precautions to prevent theft. The marginal benefit of these precautions is given by MB = 60 - 3A, where A is the number of precautions Marty takes. The marginal cost of preventing theft (i.e., the time, energy, and effort expended) is given by MC = 2A. Suppose Marty purchases full insurance that pays him $8,000 if his gear is stolen. What is Marty's optimal level of precautions?
A) 0
B) 2
C) 5
D) 20

Question

Quizplus · Accepted Answer

With full insurance, Marty has no financial incentive to take precautions, as he will be compensated for the full value of his equipment if stolen. Thus, the optimal level of precautions is 0.

Marty, a Musician, Frequently Plays at Large Parties and Nightclubs