1. Consider the following hypothetical concerning the economics of products liability. Let the inverse market demand for a product be given by the expression = 5,000 20, where P is the price and Q is the quantity demanded. The inverse market supply for this product is given by the expression = 1,000 + 5 and the market is competitive. When a consumer purchases one unit of this product, a harm of $10,000 arises with a probability of 0.1. Suppose initially that consumers and firms accurately perceive this risk.

2. Consider the same inverse market demand and inverse market supply functions presented in Question 1 above. However, now suppose that consumers misperceive the risk of harm. In particular, consumers assess the probability to be 0.2. Firms correctly perceive the probability to be 0.1. Harm is fixed and still $10,000. Assume that courts do not err when awarding compensatory damages. Punitive damages are not awarded. a. What is the equilibrium price and quantity under no liability? b. What is the equilibrium price and quantity under strict liability? c. What is the reduction in economic surplus resulting from using no liability as opposed to strict liability as the liability rule? Hint: use geometry, or if you're feeling 'isky, use integral calculus