What is the socially efficient outcome? For each of the following tort rules, (i) construct a table describing the individuals' payoffs un different precaution pairs and (ii) find the equilibrium precaution choices by the individuals.
What is the socially efficient outcome? For each of the following tort rules, (i) construct a table describing the individuals' payoffs un different precaution pairs and (ii) find the equilibrium precaution choices by the individuals.
Brief Principles of Macroeconomics (MindTap Course List)
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Publisher:N. Gregory Mankiw
Chapter9: The Basic Tools Of Finance
Section: Chapter Questions
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![1.
Mr. Smith can cause an accident, which entails a monetary loss of $1000 to Ms. Adams. The
likelihood of the accident depends on the precaution decisions by both individuals. Specifically,
each individual can choose either "low" or "high" precaution, with the low precaution requiring
no cost and the high precaution requiring the effort cost of $200 to the individual who chooses
the high precaution. The following table describes the probability of an accident for each
combination of the precaution choices by the two individuals.
Adams chooses low precaution Adams chooses high precaution
Smith chooses low precaution
Smith chooses high precaution
0.8
0.5
0.7
0.1
1)
What is the socially efficient outcome?
For each of the following tort rules, (i) construct a table describing the individuals' payoffs under
different precaution pairs and (ii) find the equilibrium precaution choices by the individuals.
2)
a) No liability
b) Strict liability (with full compensation)
c) Negligence rule (with efficient legal standard of care)
d) Negligence with a defense of contributory negligence (with efficient legal standard of care)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F7526aa4c-8574-4ee3-beed-0c6bf7b316de%2Ffba6e8a1-4f8b-4b87-b0c7-943fd1f0badb%2F4b2yiw_processed.jpeg&w=3840&q=75)
Transcribed Image Text:1.
Mr. Smith can cause an accident, which entails a monetary loss of $1000 to Ms. Adams. The
likelihood of the accident depends on the precaution decisions by both individuals. Specifically,
each individual can choose either "low" or "high" precaution, with the low precaution requiring
no cost and the high precaution requiring the effort cost of $200 to the individual who chooses
the high precaution. The following table describes the probability of an accident for each
combination of the precaution choices by the two individuals.
Adams chooses low precaution Adams chooses high precaution
Smith chooses low precaution
Smith chooses high precaution
0.8
0.5
0.7
0.1
1)
What is the socially efficient outcome?
For each of the following tort rules, (i) construct a table describing the individuals' payoffs under
different precaution pairs and (ii) find the equilibrium precaution choices by the individuals.
2)
a) No liability
b) Strict liability (with full compensation)
c) Negligence rule (with efficient legal standard of care)
d) Negligence with a defense of contributory negligence (with efficient legal standard of care)
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