I. LEGAL PROCESS. Answer each of the questions below the information in sentence form. Be clear in your answer. If you need more than one sentence, use extra sentences to further explain your meanings. Justify each statement or conclusion. Write carefully and in your own words.
Facts: Philip injures Rodney, causing damages of $5,000. Rodney must decide whether or not to assert a legal claim. If Rodney asserts a legal claim, he will face additional decisions in trying to resolve the dispute. Here are some of the relevant costs and benefits:
- The cost to Rodney of filing suit is $100.
- If he files suit, there is a 10% chance that Philip will offer Rodney $500 to settle the case at that time and a 90% chance that Philip will make no offer to settle at that time.
- Discovery would cost Rodney $1000.
- If Rodney proceeds with discovery, he expects that Philip will offer to settle for $2,000 with
probability .2, and he expects that Philip will make no offer to settle with probability .8.
- If Rodney proceeds to trial, there is a 50% chance that, following completion of the trial,
Rodney will win a judgment of $5000 against Philip.
- A trial would cost Rodney $1500.
- There is a 50% chance that Rodney will win nothing at trial.
- If he loses at trial, an appeal will cost him $500.
- If Rodney loses at trial, there is a 15% chance that he will win a $5000 judgment against Philip on appeal. There is an 85% chance that Rodney will win nothing on appeal.
Assume that both parties are risk neutral and assume that Rodney wants to act in the way that maximizes the expected value of his net payoff.
Questions
1. Should Rodney file suit? What is the expected net value of filing suit?
2. If, immediately after Rodney files suit, Philip offers to settle for $290, ought Rodney to accept?
3. If, following discovery but before trial, Philip offers $1200 to Rodney to settle, ought Rodney to accept the offer or proceed to trial?
4. Assume Rodney loses at trial. After trial, Philip offers to settle with Rodney for $225. Ought Rodney to accept this offer?
II. DRIVER AND PEDESTRIAN. Answer each of the questions below the information in sentence form. Be clear in your answer. If you need more than one sentence, use extra sentences to further explain your meanings. Justify each statement or conclusion. Write carefully and in your own words.
Facts: Terry can drive his car fast, moderate, or slow. As he drives faster, Terry's benefit increases from 55 to 85 to 120. Pat the pedestrian can walk, which pays a benefit of 0, or run which yields a benefit of 5. Pat's risk of an accident increases as Terry and Pat move faster. The risk of accident can be expressed in terms of expected accident costs. The following table summarizes the benefits and expected costs for Terry and Pat. To illustrate how to read a cell in the table, if Terry drives at medium speed and Pat runs, Terry's benefit equals 85, Pat's benefit equals 5, and Pat's expected accident cost equals 55, thus yielding net benefits to Pat equal to 5-55.
Pat's Benefit Minus Her Expected
Costs from An Accident
Terry's Benefit Walk Run
Fast 120, 0-85 120, 5-105
Medium 85, 0-40 85, 5-55
Slow 55, 0-30 55, 5-40
Assume both parties are rational, possess perfect knowledge of all information contained in the above table, and maximize their expected values.
Questions:
1. What behaviors by Terry and Pat are socially efficient?
2. Assume the tort rule is no liability. What behaviors do Terry and Pat choose?
3. Assume the tort rule is negligence, and Terry is negligent unless he drives at the efficient speed. What behaviors do Terry and Pat choose?
4. Assume the tort rule is strict liability with a defense of contributory negligence defense, and Pat is negligent unless her behavior is efficient. What behavior does Terry choose? What is his expected net payoff (payoff net of expected liability)?
III. ERRORS IN NEGLIGENCE STANDARD. Answer each of the questions below the information in sentence form. Be clear in your answer. If you need more than one sentence, use extra sentences to further explain your meanings. Justify each statement or conclusion. Write carefully and in your own words.
Facts: A recent study has demonstrated conclusively that the installation of a certain device on each automobile reduces the probability of auto/pedestrian accidents from 25% to 20%. The average cost to the pedestrian of each such accident is $20,000. The cost of the device is $1,200.
Questions:
1. Use the marginal Hand Rule to determine whether driving without the device would constitute negligence. Be sure to define terms using Judge Hand's notation.
2. Assume the court declares that drivers who fail to install the device are negligent. Assume the tort rule is negligence. If the negligent injurer is liable for the increase in accidents from 20% to 25% caused by his or her negligence, will the driver who seeks to minimize his expected costs install the device?
3. As in question 2, assume the court declares that drivers who fail to install the device are negligent, and assume the tort rule is negligence. Unlike in question 2, however, assume that the court cannot tell whether or not a particular accident would have been avoided by use of the device. Consequently, the court holds the negligent injurer liable for all the harm caused by accidents (not just the increase from 20% to 25%). Will the driver who seeks to minimize his expected costs install the device? |
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