1. Let's go back to the game played between Charlotte (automobile driver) and Erica (bicyclist). Assume that they are traveling at night. Charlotte could reduce the change of hitting Erica by installing brighter lights. Erica can reduce the change of being hit by wearing a vest. Suppose the cost of brighter lights is $30, and the cost of a vest is $15. The damage done to Erica if there is an accident is $1,000. The table below shows the probabilities of an accident, which depend on the level of care taken by each: No Vest Normal Lights Bright Lights a. What is the efficient level of precaution taken by both sides? Charlotte 8% 3% Erica Vest 5% 1% b. For each of the following rules, determine what level of precaution Charlotte and Erica will take. i. negligence w/ a defense of contributory negligence ii. strict liability with contributory negligence iii. comparative negligence For each rule you will have to complete the payoff tables (I will provide templates on the exam), and then find the equilibrium in each game. c. Who bears the residual risk for each rule? What does that say about Erica's and Charlottes activity levels?

1. Let's go back to the game played between Charlotte (automobile driver) and Erica (bicyclist). Assume that they are traveling at night. Charlotte could reduce the change of hitting Erica by installing brighter lights. Erica can reduce the change of being hit by wearing a vest. Suppose the cost of brighter lights is $30, and the cost of a vest is $15. The damage done to Erica if there is an accident is $1,000. The table below shows the probabilities of an accident, which depend on the level of care taken by each: No Vest Normal Lights Bright Lights a. What is the efficient level of precaution taken by both sides? Charlotte 8% 3% Erica Vest 5% 1% b. For each of the following rules, determine what level of precaution Charlotte and Erica will take. i. negligence w/ a defense of contributory negligence ii. strict liability with contributory negligence iii. comparative negligence For each rule you will have to complete the payoff tables (I will provide templates on the exam), and then find the equilibrium in each game. c. Who bears the residual risk for each rule? What does that say about Erica's and Charlottes activity levels?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Topic is information economics
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