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Please finish this exam in very high quality, and make me own a good grade. Thank you very much

Instructions

1) All work that you submit must be your own. You are not permitted to consult with anyone else when completing this exam.

2) This exam is open book. You are welcome to use references such as your textbook or class notes.

3) Please answer every question completely and concisely. To receive full credit your answer should fully address the question being asked without including a significant amount of unnecessary information. Support all answers with a clearly laid out economic argument and/or relevant economic model (graphical, mathematical or both).

4) Show all work to and provide full explanations to receive full credit.

5) However you choose to present your work, please make sure that it is both easy to read and understand. In order to receive credit for your work, I must be able to easily understand the information you are presenting.

6) You must submit your exam via moodle as a PDF by 11:59 PM Sunday 3/28

There are 6 questions in total, please finish the exam as good as you can.

Economics 334
Exam 1
Instructions
1) All work that you submit must be your own. You are not permitted to consult with anyone else when
completing this exam.
2) This exam is open book. You are welcome to use references such as your textbook or class notes.
3) Please answer every question completely and concisely. To receive full credit your answer should fully
address the question being asked without including a significant amount of unnecessary information.
Support all answers with a clearly laid out economic argument and/or relevant economic model (graphical,
mathematical or both).
4) Show all work to and provide full explanations to receive full credit.
5) However you choose to present your work, please make sure that it is both easy to read and understand. In
order to receive credit for your work, I must be able to easily understand the information you are
presenting.
6) You must submit your exam via moodle as a PDF by 11:59 PM Monday 3/29.
1.
Remember that the Trinity College standards of Academic Integrity apply to both this exam and all
your coursework at Trinity College.
Please acknowledge that you are aware that this exam is open book and that you will complete the
exam by yourself without consulting with anyone nor providing help to anyone else taking the
exam.
2.
a.
Carefully describe the difference between Pareto efficiency and Kaldor-Hicks efficiency.
What are the advantages and disadvantages of each? Which one does law and economics
use? Why? (10)
b.
Consider the case of Fontainebleu Hotel Corp. v Forty-Five Twentry-Five Inc. in which the
Fontainebleu Hotel began construction of a 14-story addition that, when complete, would cast
a shadow over the cabana, swimming pool, and sunbathing area of the Eden Roc Hotel next
door rendering them unusable. Using an economic approach, carefully describe how you
would determine the socially optimal outcome in this scenario. (10)
3.
According to Holmes’ “The Path of the Law” how should one approach the study of the law? (10)
4.
Suppose that one out of every 50 consumers have an accident while using a trampoline and if an
accident does occur there is a 20% chance that it is serious injury causing $7,000 in damages.
Trampoline manufacturers could install a safety feature that reduces the probability of a serious
accident to 2%, though it would increase their cost of manufacturing by $25.
a.
If an accident does occur on a trampoline manufactured without the safety feature, should the
manufacturer be found negligent of not using the safety feature? (10)
b.
Suppose that there is not enough evidence for the court to determine if the manufacturer did
or did not install the safety feature. Does economics suggest it would be appropriate to
invoke the legal doctrine of res ipsa loquitur? Carefully explain why or why not. (10)
5.
For each of the following liability rules:
i. no liability
ii. strict liability
iii. negligence.
a. Carefully explain why the outcome will be efficient or inefficient in the case of a unilateral
care model. (10)
b. Which rule(s) does economics suggest is optimal in the case of unilateral care? Explain. (10)
6.
Carefully explain the reasonable person standard and its purpose in tort law. When the reasonable
person standard is used, does it insure the outcome will be efficient outcome? Explain. (15)
7.
Explain how product liability law evolved over time. What was the initial law regarding product
liability? What type of liability rule did this represent? What is the current law regarding product
liability? What type of liability rule does this represent? What caused the change? Is the current law
regarding product liability efficient? Explain. (15)
Announcements:
Problem set 1 due Monday 3/8 at 8:40 AM
Read “The Path of Law” by Holmes, Miceli Chp 1,2
Review of microeconomics
1) welfare economics: study of how the allocation of resources and goods affects social welfare
that examines the performance of the economy both efficiency and distribution
2) efficiency: aggregate welfare (measured by profit or utility) maximized or aggregate costs
minimized
a. efficiency say nothing about the distribution of wealth
3) 1st theorem of welfare economics: competitive markets will result in an efficient outcome
a. no reallocation of resources can increase welfare (size of the social ‘pie’)
b. says nothing about the distribution of wealth, only that it is maximized
4) 2nd theorem of welfare economics: any distribution of wealth can be achieve by a competitive
equilibrium through lump sum transfers
a. Outcome will be efficient
b. theoretically efficiency and equity are not incompatible
c. but redistribution through taxation alters in individual incentives → equity/efficiency
tradeoff
5) market failures
a. monopoly/market power
b. externality: market transaction imposes a cost/benefit on an uninvolved 3rd party
i. traditionally economics suggests internalizing the externality through
tax/subsidy
c. public goods
i. non-rivalrous: one individual’s consumption does not impact another
individual’s ability to consume the good
ii. non-excludable: there is no effective way to prevent consumers from using the
good
iii. free rider problem: the private market under-provides goods with a personal
cost but a common benefit
6) uncertainty and imperfect information
a. expected value example:
i. 80% chance win court case resulting in $20,000
ii. 20% chance lose court case resulting in $0
iii. $2,000 in legal fees
iv. 𝐸[𝑥] = .80($20,000 − $2,000) + .20(−$2,000) = $14,000
b. another expected value example:
i. gain $500 benefit a month from driving
ii. 1% chance each month of getting into an accident resulting in -$10,000
iii. 𝐸[𝑥] = 500 − .01($10,0000)=$400
c. risk aversion → results from diminishing marginal benefit/utility
d. moral hazard: a situation that creates an inefficient outcome because incentives are
not properly aligned – under-invest in costly activities (such as precaution) because the
consequences are born by another party
e. adverse selection: a situation where asymmetric information combined with
unobserved characteristics of a product result in an inefficient market outcome
i. Akerlof 1970 “The Market for Lemons: Quality Uncertainty and the Market
Mechanism”
ii. “rigged trade”
Chapter 1 Introduction to Law and Economics
Law
individual incentives
rational decision maker (“bad man”)
courts
monetary damages, fines, prison
Economics
Individual incentives
rational decision makers
markets
prices
1) prediction theory of the law arose out of “The Path of the Law” by Holmes
a. bad man is an amoral rational decision maker
b. break law if perceived 𝑀𝐵 > 𝑀𝐶
c. does not imply people are immoral
2) positive vs normative analysis
a. positive analysis explains the consequences of legal sanctions
i. explains the world as it is
ii. factual
iii. can be proven true or false through analysis
b. normative analysis explains how law can be improved to be more efficient
i. explains the world as it should be
ii. opinion
3) efficiency
a. does not measure fairness or justice
b. often the best proxy for welfare in evaluating legal rules
c. can provide insight even if it is not the ideal measure
d. Pareto efficiency
i. Pareto superior: both individuals are as well off as before and at least one
individual is better off
ii. Pareto efficient: there is no allocation of resources that can make one
individual better off without making another individual worse off
1. Advantages: a. unanimous b. unsensual
2. Disadvantages: a. does not lead to a unique allocation b.depends on
starting point
iii. potential Pareto efficiency or Kaldor-Hicks efficiency: there is no allocation of
resources that can increase total social welfare (make society better off)
1. winners win more than losers lose
2. total impact: positive net gain to society
3. full compensation is possible, but not paid
4. cost-benefit analysis
5. maximizes total wealth of society
e. exchange
i. Pareto efficiency results in consensual exchange (actual consent)
ii. Kaldor-Hicks efficiency results in non-consensual exchange (implied consent)
1. as the size of the economic pie expands so does the size of the average
piece
2. common law follows Kaldor-Hicks efficiency
4) Coase theorem
a. consider the market of externality
b. not all gains from trade are realized → market intervention justified
c. example: the farmer and the rancher (Coase 1967)
i. rancher’s cattle sometimes stray onto farmer’s land and damage the crops
ii. traditionally economics suggests we internalize the externality through tax or
regulation
iii. assign property rights and purchase an efficient amount of the ability to infringe
upon these rights
d. Coase challenged
i. well-defined injurer and victim: both parties are necessary for harm to occur
ii. government intervention required to internalize the externality
iii.
Herd
1
2
3
4
5
Total Damage
1
3
6
10
15
Marginal Damage
1
2
3
4
5
iii. marginal benefit of steer $3.00 and marginal cost $0
iv. private optimal herd size
v. social optimal herd size MB=MD
e. suppose there is no government intervention in this scenario, can the farmer and
rancher reach a mutually beneficial agreement to achieve the optimal herd size?
f. Coase theorem: efficiency outcome will be achieved without government intervention
regardless of the initial assignment of property rights as long as:
1. Property rights are well defined
2. Transaction/bargaining costs are low
Announcements:
Problem set 1 due Wednesday 3/10 at 8:40 AM
Miceli Chp 1,2
Review of microeconomics
1) welfare economics: study of how the allocation of resources and goods affects social welfare
that examines the performance of the economy both efficiency and distribution
2) efficiency: aggregate welfare (measured by profit or utility) maximized or aggregate costs
minimized
a. efficiency say nothing about the distribution of wealth
3) 1st theorem of welfare economics: competitive markets will result in an efficient outcome
a. no reallocation of resources can increase welfare (size of the social ‘pie’)
b. says nothing about the distribution of wealth, only that it is maximized
4) 2nd theorem of welfare economics: any distribution of wealth can be achieve by a competitive
equilibrium through lump sum transfers
a. outcome will be efficient
b. theoretically efficiency and equity are not incompatible
c. but redistribution through taxation alters in individual incentives → equity/efficiency
tradeoff
5) market failures
a. monopoly/market power
b. externality: market transaction imposes a cost/benefit on an uninvolved 3rd party
i. traditionally economics suggests internalizing the externality through
tax/subsidy
c. public goods
i. non-rivalrous: one individual’s consumption does not impact another
individual’s ability to consume the good
ii. non-excludable: there is no effective way to prevent consumers from using the
good
iii. free rider problem: the private market under-provides goods with a personal
cost but a common benefit
6) uncertainty and imperfect information
a. expected value example:
i. 80% chance win court case resulting in $20,000
ii. 20% chance lose court case resulting in $0
iii. $2,000 in legal fees
iv. 𝐸[𝑥] = .80($20,000 − $2,000) + .20(0 − $2,000) = $14,000
v. 𝐸[𝑥] = .80($20,000) + .20(0) − $2,000 = $14,000
b. another expected value example:
i. gain $500 benefit a month from driving
ii. 1% chance each month of getting into an accident resulting in -$10,000
iii. 𝐸[𝑥] = 500 − .01($10,0000)=$400
c. risk aversion → results from diminishing marginal benefit/utility
d. moral hazard: a situation that creates an inefficient outcome because incentives are
not properly aligned – under-invest in costly activities (such as precaution) because the
consequences are born by another party
e. adverse selection: a situation where asymmetric information combined with
unobserved characteristics of a product result in an inefficient market outcome
i. Akerlof 1970 “The Market for Lemons: Quality Uncertainty and the Market
Mechanism”
ii. “rigged trade”
Chapter 1 Introduction to Law and Economics
Law
individual incentives
rational decision maker (“bad man”)
courts
monetary damages, fines, prison
Economics
Individual incentives
rational decision makers
markets
prices
1) prediction theory of the law arose out of “The Path of the Law” by Holmes
a. bad man is an amoral rational decision maker
b. break law if perceived 𝑀𝐵 > 𝑀𝐶
c. does not imply people are immoral
2) positive vs normative analysis
a. positive analysis explains the consequences of legal sanctions
i. explains the world as it is
ii. factual
iii. can be proven true or false through analysis
b. normative analysis explains how law can be improved to be more efficient
i. explains the world as it should be
ii. opinion
3) efficiency
a. does not measure fairness or justice
b. often the best proxy for welfare in evaluating legal rules
c. can provide insight even if it is not the ideal measure
d. Pareto efficiency
i. Pareto superior: both individuals are as well off as before and at least one
individual is better off
ii. Pareto efficient: there is no allocation of resources that can make one
individual better off without making another individual worse off
1. unanimous
2. does not lead to a unique allocation
3. depends on starting point
iii. potential Pareto efficiency or Kaldor-Hicks efficiency: there is no allocation of
resources that can increase total social welfare
1. winners win more than losers lose
2. full compensation is possible, but not paid
3. cost-benefit analysis
4. maximizes total wealth of society
e. exchange
i. Pareto efficiency results in consensual exchange (actual consent)
ii. Kaldor-Hicks efficiency results in non-consensual exchange (implied consent)
1. as the size of the pie expands so does the size of the average piece
2. common law follows Kaldor-Hicks efficiency
4) Coase theorem
a. consider the market of externality
b. not all gains from trade are realized → market intervention justified
c. example: the farmer and the rancher (Coase 1967)
i. rancher’s cattle sometimes stray onto farmer’s land and damage the crops
ii. traditionally economics suggests we internalize the externality through tax or
regulation
iii. assign property rights and purchase an efficient amount of the ability to infringe
upon these rights
d. Coase challenged
i. well-defined injurer and victim
ii. government intervention required to internalize the externality
iii.
f.
Herd
1
2
3
4
5
Total Damage
1
3
6
10
15
Marginal Damage
1
2
3
4
5
iii. marginal benefit of steer $3.00 and marginal cost $0
iv. private optimal herd size
v. social optimal herd size
suppose there is no government intervention in this scenario, can the farmer and
rancher reach a mutually beneficial agreement to achieve the optimal herd size?

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