Negligence: Lola is the owner of a Marina at Catalina Island. Lola allows yacht
ID: 332001 • Letter: N
Question
Negligence: Lola is the owner of a Marina at Catalina Island. Lola allows yacht owners to dock their boats in her Marina for a daily rental fee. Lola hired Frank to take care of the Marina and its dock Monday through Friday. If Frank is not present, the probability that a yacht will break loose from the dock and cause damage to other boats is 10%. If Frank is present, then the probability of a yacht breaking loose and causing damage is reduced to 5%. However, in order to realize the reduction in the probability of an accident occurring, Lola must induce Frank to give up his weekends by offering him a higher salary. Suppose Frank’s higher salary will cost Lola $5,000 more. Further suppose that if a yacht breaks loose it will result in an estimated $200,000 in damages.
If Lola does not hire Frank to work on the weekend, is she negligent?
What if Lola is forced to incur a $15,000 salary increase to induce Frank to work on weekends, is she negligent if she does not hire Frank on the weekends?
Explanation / Answer
Case 1
If Frank is hired and made to work on weekends, the probability of accident occurring is 5%
Therefore, calculating the Expected monetary value (EMV) = $5,000 + 5% of $200,000
= $15,000
If Frank is not hired the probability of accident occurring is 10%
The Expected monetary value (EMV) is = 10% of $200,000
= $20,000
Therefore, hiring Frank is wise decision, and Lola in negligent if she does not hire Frank.
Case 2
If Lola is forced to incur a $15,000 salary increase to induce Frank to work on weekend
The Expected monetary value (EMV) = $15,000 + 5% of $200,000
= $25,000
In this case EMV is higher than EVM of accident occurring.
Therefore, Lola is not negligent if she does not hire Frank