2. Consider the economic model of tort liability that we studied in class. Use the following functions for the model. p(x) = 1/√x (that is, one over a square root of x), where x denotes the injurer's precaution level. w=5, where w denotes the unit cost of taking precaution H = 10,000 (harm from the accident) 1. Now consider the simple negligence rule. a) What level of precaution will the injurer choose if the legal standard of care is set at x*. Draw a graph to illustrate your answer. b) Now assume that the injurer believes that the legal standard of care is set at 0.5x*. Find out the injurer's optimal level of precaution under the simple negligence rule. Draw a graph to illustrate your answer.

2. Consider the economic model of tort liability that we studied in class. Use the following functions for the model. p(x) = 1/√x (that is, one over a square root of x), where x denotes the injurer's precaution level. w=5, where w denotes the unit cost of taking precaution H = 10,000 (harm from the accident) 1. Now consider the simple negligence rule. a) What level of precaution will the injurer choose if the legal standard of care is set at x. Draw a graph to illustrate your answer. b) Now assume that the injurer believes that the legal standard of care is set at 0.5x. Find out the injurer's optimal level of precaution under the simple negligence rule. Draw a graph to illustrate your answer.

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter20: The Problem Of Adverse Selection Moral Hazard

Section: Chapter Questions

Problem 20.4IP

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