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 high precaution Adams chooses low precaution Smith chooses low precaution 0.8 0.5 Smith chooses high 0.7 0.1 precaution Question: 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. 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)

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
icon
Related questions
Question
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 high
precaution
Adams chooses low
precaution
Smith chooses low precaution 0.8
0.5
Smith chooses high
0.7
0.1
precaution
Question:
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.
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)
Transcribed Image Text: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 high precaution Adams chooses low precaution Smith chooses low precaution 0.8 0.5 Smith chooses high 0.7 0.1 precaution Question: 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. 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)
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps

Blurred answer
Knowledge Booster
Risk Aversion
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education