Exam 3 S2023 Key Version A

Test 3—Test Version A Law & Economics; Rutgers New Brunswick Spring 2023 Instructor: Ruth Gilgenbach 1. What is the primary difference between tort laws under a strict liability and a simple negligence standard? a. Strict liability laws require that the defendant is injured, and the plaintiff caused it, while simple negligence rules require those two elements plus a finding that the plaintiff breached a duty of due care to the defendant. b. Strict liability laws require that the plaintiff is injured, and the defendant caused it, while simple negligence rules require those two elements plus a finding that the defendant breached a duty of due care to the plaintiff. c. Simple negligence laws require that the plaintiff is injured, and the defendant caused it, while strict liability rules require those two elements plus a finding that the defendant breached a duty of due care to the plaintiff. d. Simple negligence laws require that the defendant is injured, and the plaintiff caused it, while strict liability rules require those two elements plus a finding that the plaintiff breached a duty of due care to the defendant. e. There is no difference between simple negligence and strict liability 2. Which of the following describes a strict liability with a defense of contributory negligence standard? a. The injurer is liable if he was negligent b. The injurer is liable if he was negligent, unless the victim was also negligent c. The injurer is liable whether or not he was negligent d. The injurer is liable whether or not he was negligent, unless the victim was also negligent e. If the injurer and victim are both negligent, they must share the cost of liability 3. Which of the following describes a simple negligence standard? a. The injurer is liable if he was negligent b. The injurer is liable if he was negligent, unless the victim was also negligent c. The injurer is liable whether or not he was negligent d. The injurer is liable whether or not he was negligent, unless the victim was also negligent e. If the injurer and victim are both negligent, they must share the cost of liability 1

4. Which of the following describes a strict liability standard? a. The injurer is liable if he was negligent b. The injurer is liable if he was negligent, unless the victim was also negligent c. The injurer is liable whether or not he was negligent d. The injurer is liable whether or not he was negligent, unless the victim was also negligent e. If the injurer and victim are both negligent, they must share the cost of liability 5. A car hits a bicyclist and does $500 worth of damage to the bike. The bicyclist is not physically injured, and there is no damage to the car. The bicyclist was biking unsafely —not using a light at night, and no brakes on his bike. The car was driving carefully, but the accident happened anyway. Under which liability standard is the car driver liable for at least some damages? a. Strict liability b. Negligence with a defense of contributory negligence c. Strict liability with a defense of contributory negligence d. A and C only e. The driver wouldn’t be liable under any of these standards 6. A car hits a bicyclist and does $500 worth of damage to the bike. The bicyclist is not physically injured, and there is no damage to the car. The bicyclist was biking safely —he had lights, was wearing a helmet, etc. The car was driving carefully , but the accident happened anyway. Under which liability standard is the car driver liable for at least some damages? a. Strict liability b. Comparative negligence c. Simple negligence d. A and B only e. A, B and C 7. A car nearly hits a bicyclist but does not. The bicyclist is not injured, and sustained no damage to his bicycle. The bicyclist was biking safely —he had lights, was wearing a helmet, etc. The car was driving unsafely —drunk and texting. Under which liability standard is the car driver liable for at least some damages? a. Strict liability with a defense of contributory negligence b. Negligence with a defense of contributory negligence c. Simple negligence d. A B and C e. The driver wouldn’t be liable under any of these standards 2

13. Under the legal standard of negligence with a defense of contributory negligence, who is the residual bearer of risk? a. The injurer b. The victim c. Both the injurer and the victim d. Neither the injurer nor the victim 14. Under the legal standard of comparative negligence, who is the residual bearer of risk? a. The injurer b. The victim c. Both the injurer and the victim d. Neither the injurer nor the victim 15. Which of the following statements are true? a. Property law covers situations where transaction costs are low enough to get agreement ahead of time b. Contract law covers situations where transaction costs are low enough for us to agree to a contract, but high enough that we might not want to renegotiate the contract later c. Tort law covers situations where transaction costs are too high to agree to anything in advance, and injunctions are not feasible. d. A and B are true e. A, B, and C are all true 16. Consider the equation: TC=wx+p(x)*A. Which of the following is true? a. wx is the cost of precaution level x b. p(x)A is the expected cost of accidents given precaution level x c. p’(x) is the reduction in the probability of an accident given a slight increase in precaution level x. d. A and B are true e. A, B, and C are all true 4

17. Which of the following statements on the administrative costs of trials is true? a. Strict liability laws lead to more trials but simpler trials than negligence laws. The net effect of this is that administrative costs are lower with strict liability than negligence laws b. Strict liability laws lead to more trials but simpler trials than negligence laws. The net effect of this is that administrative costs are lower with negligence laws than strict liability c. Strict liability laws lead to more trials but simpler trials than negligence laws. The net effect of this is unclear—strict liability may lead to higher or lower administrative costs than negligence laws d. Negligence laws lead to more trials but simpler trials than strict liability laws. The net effect of this is unclear—strict liability may lead to higher or lower administrative costs than negligence laws e. Negligence laws lead to more trials but simpler trials than strict liability laws. The net effect of this is that administrative costs are lower with negligence laws than strict liability 18. Which of the following represent potential tangible harms associated with a tort? a. Medical costs b. Emotional harm c. Lost income d. All of the above e. A and C 5

21. Which of the above payoff matrices is correct if the legal standard is negligence with a defense of contributory negligence? a. Matrix I b. Matrix II c. Matrix III d. Matrix IV e. None of the above 22. What is the efficient outcome if the legal standard is simple negligence? a. Both parties take precaution b. Neither party takes precaution c. Injurer takes precaution, but victim does not d. Victim takes precaution, but injurer does not 23. What is the Nash Equilibrium if the legal standard is simple negligence? a. Both parties take precaution b. Neither party takes precaution c. Injurer takes precaution, but victim does not d. Victim takes precaution, but injurer does not 24. What is the Nash Equilibrium if the legal standard is negligence with a defense of contributory negligence? a. Both parties take precaution b. Neither party takes precaution c. Injurer takes precaution, but victim does not d. Victim takes precaution, but injurer does not 7

25. What is the efficient outcome if the legal standard is strict liability? a. Both parties take precaution b. Neither party takes precaution c. Injurer takes precaution, but victim does not d. Victim takes precaution, but injurer does not 26. What is the Nash Equilibrium if the legal standard is strict liability? a. Both parties take precaution b. Neither party takes precaution c. Injurer takes precaution, but victim does not d. Victim takes precaution, but injurer does not 27. Assume that instead of costing $25 to take a unit of precaution, taking precaution instead costs $75 for each party, but everything else is unchanged. In this case, what is the efficient outcome if the outcome is comparative negligence? a. Both parties take precaution b. Neither party takes precaution c. Injurer takes precaution, but victim does not d. Victim takes precaution, but injurer does not 28. As above, assume that instead of costing $25 to take a unit of precaution, taking precaution instead costs $500 for each party, but everything else is unchanged. In this case, what will each party do if the legal standard is comparative negligence? a. Both parties take precaution b. Neither party takes precaution c. Injurer takes precaution, but victim does not d. Victim takes precaution, but injurer does not 29. Which of the following is true? a. It is (in general) 2 efficient to take the maximum amount of precaution possible b. It is (in general) efficient for a “injurer” to take no precaution if the legal standard is no liability. c. It is (in general) efficient for an “injurer” to take no precaution if the legal standard is strict liability. d. None of these are true. e. All of these (A-C) are true 2 “In general” means in most cases, but not necessarily all of the time 8

Questions 33-36 refer to the following scenario. Imagine that there is an oil tanker; if the oil tanker crashes and causes a spill, it will cause $100,000,000 worth of harm. The oil tanker’s owner may purchase an updated navigation system at a cost of $300,000. The updated navigation system would reduce the likelihood of an accident from 1/200 to 1/1000. Imagine further that the oil tanker’s owner’s business is worth $10,000,000 and in the event of an accident the business will declare bankruptcy, sell its assets, and close. 33. What is reduction in expected harm caused by the installation of an upgraded navigation system? Is this updated navigation system efficient? a. Expected harm is reduced by $400,000; this system is efficient b. Expected harm is reduced by $400,000; this system is inefficient c. Expected harm is reduced by $40,000; this system is efficient d. Expected harm is reduced by $40,000; this system is inefficient e. Expected harm is reduced by $100,000,000; this system is efficient 34. The oil tanker’s owner would be described by which of the following terms: a. Vicariously liable b. Respondeat superior c. Judgement-proof d. Moral Hazard e. Adverse selection 35. Under which liability rules will the oil tanker owner install the advanced navigation system? a. Strict liability b. Simple negligence c. Negligence with a defense of contributory negligence d. All of the above (A-C) e. None of the above. 36. Suppose that advanced cruise control reduces the probability of a fatal accident by 1/1000. If someone pays $2000 more for a car with advanced cruise control than for an otherwise-identical car, this implies that the person values their life how much? a. At least $2000 b. At least $2,000,000 c. At least $20,000,000 d. No more than $2,000,000 e. Exactly $2,000 10

37. Courts are least likely to award punitive damages when the injurer’s behavior was: a. Fraudulent b. Willful and wanton c. Oppressive d. Unintentional e. The court is equally likely to award punitive damages in all of these situations Questions 38-40 refer to the following scenario: the injurer and victim can each take precautions against an accident by investing in precaution, which we call x. The probability of an accident, p(x) is given by p ( x ) = 4 x p ' ( x ) = − 4 x 2 The cost of taking each additional “unit” of precaution is w =1. The cost of an accidents, if it occurs, is A =25. 38. What is the efficient level of precaution for the injurer to take? a. 0 b. 1 c. 10 d. 20 e. 25 39. What is the total social cost if the injurer takes the efficient amount of precaution?? a. 0 b. 1 c. 10 d. 20 e. 25 40. What level of precaution will the injurer take if the legal standard is strict liability with a defense of contributory negligence, and the legal standard of care is set at the efficient level? a. 0 b. 1 c. 10 d. 20 e. 25 11