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I need help with my Law and Economics final! Someone please help
ECON 4100: Law & Economics
Take-home Final Exam
DUE: Monday, May 2nd @ NOON (D2L Dropbox)
1. This is an open-book, open-notes exam, which means that you are allowed
to use any of the materials from class. You may also use your textbook or
the internet, where necessary. You may NOT, however, discuss this exam
with anyone else. If you have questions, please come see me or send me an
email. If you ask for (or receive) help from anyone other than me, your
score on this exam will automatically be zero.
2. You may type the exam or handwrite it. However you prepare the exam,
you must turn in the exam as a single document (.docx or PDF) that is in the
3. For the ?short answer questions,? one of the most important components in
your score will be the quality of your answer. While this is NOT an essay
test, the purpose of these short answer questions is to provide you with a
way to demonstrate your understanding of the material. So, you should be
trying to give well-constructed, well-thought-out explanations (no single
sentence answers). Simply because your answer is factually correct does not
mean that you will earn full credit.
4. For questions that require calculation or filling in tables (such as question
#7), you need to show (write out) all of your calculations. Also, please do
your best to make sure the ?final answer? is easy to find.
5. The last page contains a bonus question. This question is worth up to 10
bonus points on this exam. Partial credit will be given.
6. Good luck! Do your best and have a great summer!!
SHORT ANSWER QUESTIONS
Please answer the following questions thoroughly. Your explanation need not be long, but
should be complete! Your responses will be graded on quality AND correctness. Good luck!
From an efficiency standpoint, economists are interested in determining the impact that
tort liability rules have on victim and injurer (?tort malfeasor?) precaution. Please
discuss the incentives for optimal precaution created by tort liability rules of (i) no
liability, (ii) strict liability, and (iii) simple negligence. What incentives does each create
for victims or injurers to engage in optimal precaution? (6 points)
Academic researchers have noted damage awards have an ambiguous effect on the
number of lawsuits. In other words, increases in damage awards do not necessarily result
in increases in the lawsuits filed. Discuss the conflicting incentives/effects created by
increased damage awards that make the net effect uncertain. (6 points)
In the legal process, one of the most important steps is the exchange of information
between the parties (plaintiff and defendant). We talked about two types of information
exchange: voluntary and involuntary. What is the difference between these two types of
information? What effect does each have on the likelihood of settlement? (6 points)
Jane was injured in a car accident with Sally. In the accident, Sally?s car crashed into
Jane?s car. Jane has decided to sue Sally in order to recover damages for the accident
(which she believes was Sally?s fault). In order to a court to side for the plaintiff (Jane),
it must be shown that Sally was negligent. Suppose there were three things that Sally
could have done to avoid the accident: (i) drive slower, (ii) paid less attention to her cell
phone, and (iii) paid more attention to the other cars on the road. Suppose that the
probability of Sally being negligent in any one of those things is 0.3. In other words,
there is a 30% chance that Sally?s speed was negligent (i.e. too high). Would a court rule
that Sally was negligent in the accident? What is the probability that Sally was not
negligent in any of these areas? Be sure to show your work and fully explain your
answer. (6 points)
Class action lawsuits have become increasingly popular in the past decade in tort claims
(i.e. ?mass torts?). From an efficiency standpoint, what are the potential benefits and
costs associated with the use of a class action lawsuit? When might a plaintiff or
defendant not want to make a claim into a class action? (6 points)
Your parents live in a $1 million house on Belle Meade Boulevard. Your parents, to help
you get off to a good start in life, agree to sell you the house a year from now for $1 (one
dollar). Before the final closing date, the stock market tanks and wipes out your parents?
retirement savings. They can no longer afford to sell you the house for $1 and so they tear
up the contract. You take them to court for breach of contract. What does the court likely
say? Why? (6 points)
Please answer the following questions. For full credit, you should show and/or explain all
necessary calculations. Answers with no explanations or calculations will receive zero credit.
(18 total points) Ross is walking across campus after taking his economics final exam.
Aaron is driving around campus looking for a parking spot. This creates a situation
where an accident might occur. In this question, we will look at each party?s precaution
in relation to various liability rules. Regardless of the liability rule, here are the ?facts?
you should use in answering the question (i.e. this information does not change):
? If BOTH Aaron and Ross take precaution, then the probability of an accident is
? If ONLY ONE takes precaution (it does not matter which one), then there is a 0.2
probability of an accident
? If NEITHER take precaution, then there will be an accident (i.e. probability of
accident = 1)
? The cost of precaution is $20
? Ross suffers damages of $100 if there is an accident
a. No Liability. Assume that the tort rule is one of no liability. Use the information
above to fill in the expected payoff table below. Then find the Nash equilibrium
behavior for Ross and Aaron. (6 points)
Note: Being the nice person that I am, let me ?help? you fill in one of the boxes so
that there is less confusion.
Upper Left (Aaron=No Precaution, Ross=No Precaution):
? Aaron does not spend money on precaution AND Aaron is not liable for any
damages caused by the accident so Aaron?s expected payoff is $0
? Ross does not spend any money on precaution BUT Ross is responsible for
any expected damages. Since neither party takes precaution, the probability
of an accident is 1. This means Ross? expected payoff is: cost of precaution +
expected damages = 0 + 1*(-100) = -100
b. Strict Liability. Assume that the tort rule is strict liability, which means that Aaron
is liable damages regardless of Aaron?s precaution level. Use this information to
update the expected payoffs in the table. What is the Nash equilibrium behavior for
Ross and Aaron? (6 points)
c. Simple Negligence Rule. Assume that the tort rule is a simple negligence rule,
which means that Aaron is liable for damages ONLY when Aaron does not use
precaution (i.e. when Aaron is negligent). Use this information to update the
expected payoffs table. What is the Nash equilibrium behavior for Ross and Aaron?
(10 total points) Buyer B pays $10,000 to New Orleans grain dealer D in exchange for
D?s promise to deliver grain to B?s London office on October 1. As a result of signing
this contract, B decides not to sign a similar contract with another grain dealer for
$10,500. D will transport the grain to London via ship.
Buyer B agrees to resell the grain on arrival in London for $11,000 to another party. B
pays $100 in advance (nonrefundable) as docking and unloading fees for the ship?s
projected arrival in London.
The ship begins taking on water several days out of New Orleans and returns to port.
Inspection reveals that the grain is badly damaged by the salt water and is unsuitable to
a. What is the value of expectation damages for D?s breach of contract with B? (4
b. What is the value of reliance damages for D?s breach of contract? (3 points)
c. What is the value of opportunity cost damages? (3 points)
(12 total points) Situation: A union and a firm are bargaining over the wage (w) that will
be paid to the union?s L workers (assume that the number of workers is non-negotiable).
If there is an agreement, the firm will earn revenue of R. Their costs will simply be what
they pay to the workers (wL). If there is no agreement, then the firm is out of business
and they earn zero profits. If the firm goes out of business, the union workers will each
earn a wage of wu thanks to unemployment benefits. The purpose of this exercise is to
determine the wage that will result from Nash bargaining between the two parties (the
firm and the union). You do not have ?numbers? in this problem so your answers will
actually be mathematical functions.
a. What are the disagreement profits for the firm? And the union? What is the total
b. What does each party get when an agreement is reached? What is the total surplus?
c. What is the cooperative surplus? (total surplus in #2 minus total surplus in #1)
d. If they split this surplus 50-50, how much does each party gain from agreement?
e. Using all the information from above, what is the agreed upon wage paid to the
f. Does the negotiated wage increase or decrease with the generosity of unemployment
benefits? (i.e. how does the agreed upon wage respond to an increase in wu?)
(2 points for each of the six questions)
(12 total points) The diagram below shows an overview of the legal process for a
particular plaintiff. Use the values shown on the diagram (for example: discovery costs
$1,000, settlement costs $500, the probability of winning at trial is 0.4, etc.) to complete
the calculations below. Notice that the cost of trial is left as a variable (i.e. $C). As such,
you should expect that all of your answers below will be functions of this cost (i.e. you
will not get ?neat? answers for parts (a) through (c)).
What is the expected value of appeal (EVA)? (3 points)
What is the expected value of trial (EVT)? (3 points)
What is the expected value of bargaining for settlement (EVB)? (3 points)
What is the expected value of the claim? If it costs $500 to file a claim, how high
would trial costs need to be in order for it to be optimal not to file the claim? (3
In order to make the Apple iPad?s display more visible in direct sunlight, Apple has
updated the technology behind the iPad?s display. Amazon believes that Apple?s new
display infringes upon patents that they hold for the Kindle. Amazon has retained your
services in order to estimate how much value consumers place on the feature that allows
the iPad to be viewed in direct daylight (we will call this feature DayView). In order to
accomplish this task, you have decided to conduct a conjoint study ? mimicking the study
conducted by John Hauser in the Apple-Samsung case discussed in class.
The table below shows the recoded partworth utilities that were obtained from your
regression analysis (the coefficients from a regression are used to create these values).
Your conjoint analysis measured consumer valuation of several different features of
tablets/e-readers: (1) Price, (2) Screen size, (3) Weight, and (4) DayView.
Visible in direct sunlight
Using the results from your study, how much is the ability to view a tablet/e-reader worth
to the average consumer? If you multiply this number by the total number of iPads sold,
this would give you a grand total dollar value on damages. What are some possible
criticisms of such an approach to damages calculation? (10 points)
Instructions: This question would have been a homework assignment ? but I decided it would
be better to give you more time to work on your group research project. I think it?s still a useful
exercise, so I am giving you the ?opportunity? to work on the problem?but for extra credit.
In the exam instructions, I asked you to turn in a single document. If you attempt this extra
credit, you will need to include one additional file. Your ?write-up? that describes the final
damage calculations and any assumptions made in order to produce this estimate can be included
in your file exam document. In addition to this, you should submit (via the D2L dropbox) an
Excel spreadsheet that shows all steps made in calculating the damages estimate.
Facts of the case: April Buchanon is the owner of a popular restaurant. She is currently the only
?employee? of the restaurant (i.e. she cooks, she serves the customers, etc.). On January 1, 2014,
Ms. Buchanon was struck by a negligent driver. The accident left her paralyzed. Because of the
severity of the injury, and her irreplaceable role in the success of her restaurant, she has been
forced to close her restaurant. Restaurant profits have been growing since its opening in 2003.
The table below shows the restaurants profits since opening:
Note that 2014 begins the first year of losses due to the accident (and closure of the restaurant).
In the year 2014, Ms. Buchanon has incurred hospital expenses of $150,000. In addition, her
injury requires 24-hour nursing care for the remainder of her life. This nursing care costs
$50,000 a year.
I would like you to produce two sets of damage estimates for this case. For the first estimate,
assume that Ms. Buchanon?s annual lost income (going forward) is equal to her income in 2013.
For the second estimate, I would like you to use the technique of your choice to ?forecast? Ms.
Buchanon?s future lost (annual) income.
Please use the following assumptions:
Assume that you are completing this estimate on January 1, 2015 (so that you are certain
of the hospital and nursing costs I mentioned for 2014). At the time of your report, Ms.
Buchanon is still alive.
Assume that on January 1, 2014 (the date of the accident), it was Ms. Buchanon?s 45th
birthday. Further assume that Ms. Buchanon would retire at age 65 (if no accident)
For simplicity, let?s also assume that the nurse care payments also end at age 65
(Medicare could cover nursing costs once she qualifies for Medicare)
You are interested in the net present value of these future damages (as we did in class)
Please ignore any ?extra? damages, such as retirement savings, insurance premiums,
quality of life, etc. and simply focus on the information provided in the question.
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