Assume that there are two parties, I and V. I engages in an activity that tends to injure V. V and I both can take care to reduce the expected harm from accidents. Specifically, suppose that if I takes no care (i.e., spends $0 on accident precautions), expected injury to V is $250. If I spends $40 on accident precautions, however, the expected injury to V is reduced to $175. Further suppose that V has a choice between taking no care or spending $50 in care to avoid accidents. If V spends $50 in care, V’s expected harm falls by $20 regardless of the level of care that I takes. Assume that courts adopt the socially‐optimal level of injurer care as the negligence standard. That is, if I takes less than the socially‐optimal level of care, she will be found negligent and must pay for all damages to V. If I takes at least the socially optimal level of care, she will not have to compensate V for his damages. 1. Under a negligence standard, what is I’s dominant strategy? a) I does not have a dominant strategy. b) Spend $0 on precautions. c) Spend $40 on precautions. d) Spend $40 on precautions only if V takes no precautions. e) None of the above. 2. Following question 1, under a negligence standard, what is V’s dominant strategy? a) V does not have a dominant strategy. b) Spend $0 on precautions. c) Spend $50 on precautions. d) Spend $50 on precautions only if I takes no precautions. e) None of the above. 3. Following question 1 and 2, under a negligence standard, what are the total accident and avoidance costs? a) $250. b) $280. c) $245. d) $215. e) None of the above.
Assume that there are two parties, I and V. I engages in an activity that tends to injure V. V and I both can take care to reduce the expected harm from accidents. Specifically, suppose that if I takes no care (i.e., spends $0 on accident precautions), expected injury to V is $250. If I spends $40 on accident precautions, however, the expected injury to V is reduced to $175. Further suppose that V has a choice between taking no care or spending $50 in care to avoid accidents. If V spends $50 in care, V’s expected harm falls by $20 regardless of the level of care that I takes. Assume that courts adopt the socially‐optimal level of injurer care as the negligence standard. That is, if I takes less than the socially‐optimal level of care, she will be found negligent and must pay for all damages to V. If I takes at least the socially optimal level of care, she will not have to compensate V for his damages.
1. Under a negligence standard, what is I’s dominant strategy?
a) I does not have a dominant strategy.
b) Spend $0 on precautions.
c) Spend $40 on precautions.
d) Spend $40 on precautions only if V takes no precautions.
e) None of the above.
2. Following question 1, under a negligence standard, what is V’s dominant strategy?
a) V does not have a dominant strategy.
b) Spend $0 on precautions.
c) Spend $50 on precautions.
d) Spend $50 on precautions only if I takes no precautions.
e) None of the above.
3. Following question 1 and 2, under a negligence standard, what are the total accident and avoidance costs?
a) $250.
b) $280.
c) $245.
d) $215.
e) None of the above.
4. Following question 3, what is the Nash equilibrium of this game under a rule of no liability?
a) I spends $40 on precautions and V spends $0 on precautions.
b) I spends $40 on precautions and V spends $50 on precautions.
c) I spends $0 on precautions and V spends $0 on precautions.
d) I spends $0 on precautions and V spends $50 on precautions.
e) None of the above.
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