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)

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)

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.8P

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