2. An accident costs $1000 if it occurs. If neither party takes precaution, the chance of an accident is 10%. If the injurer takes precaution, the probability of an accident de- creases by 4%. If the injuree takes precaution, the probability of an accident decreases by 2%. These differences are cumulative and independent. (I.e., if both take precau- tion, the probability of an accident is 4%.) The cost of precaution is $30 for each party which takes precaution. (a) What is the efficient amount of precaution from each party? (Precaution is a yes-or-no event here, for each party.) (b) Consider a rule of simple negligence. Does this result in the efficient outcome? Show directly if this is the case; i.e., by finding the Nash equilibrium. (c) Consider instead a rule of negligence with a defense of contributory negligence. Consider very carefully what the payoffs are, and show what is the equilibrium. Hint: You are only negligent if you fail to meet the burden of due care, not for failing to take inefficient precaution.

2. An accident costs $1000 if it occurs. If neither party takes precaution, the chance of an accident is 10%. If the injurer takes precaution, the probability of an accident de- creases by 4%. If the injuree takes precaution, the probability of an accident decreases by 2%. These differences are cumulative and independent. (I.e., if both take precau- tion, the probability of an accident is 4%.) The cost of precaution is $30 for each party which takes precaution. (a) What is the efficient amount of precaution from each party? (Precaution is a yes-or-no event here, for each party.) (b) Consider a rule of simple negligence. Does this result in the efficient outcome? Show directly if this is the case; i.e., by finding the Nash equilibrium. (c) Consider instead a rule of negligence with a defense of contributory negligence. Consider very carefully what the payoffs are, and show what is the equilibrium. Hint: You are only negligent if you fail to meet the burden of due care, not for failing to take inefficient precaution.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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