1) Search Engine and movie studios are locked in a battle regarding who should be held responsible for piracy. Studios believe that Search Engines can reduce piracy by taking some steps. Engines feel that they are already taking steps and that their user will turn away if they do not provide relevant results to them. Studios already make significant investments to stop piracy. The following table provides pay-off for search engines and studios when they take any action. Studio payoff is underlined.

Engines Action Engines No Action

Studios - Action 2000, 1000 1400, 1300

Studios- No Action 1300, 700 1000, 1500

(i) What will happen in equilibrium and, socially what is the optimal outcome?

(ii) If transaction costs are low, what outcome would be achieved? Explain clearly using the numbers above.

(iii) If transaction costs are high, who should have property rights? Why?

2) There are 3 firms Atrocious, Bad and Careless who sell products/services that involves using customers' personal data. The more products are sold, higher the chance that the customer information will be misused and customers will suffer. The following table shows the different quantities sold by Atrocious, Bad and Careless and their associated profits and probability of data misuse at these quantities. You can ignore demand curve, or pricing issues (assume that these quantities are outcome of some optimal price setting and competition in the market). In short, the firm can sell these quantities and generate associated profits.

	Profits and vulnerabilities per firm at different Sales levels
Quantity of products sold	100000	90000	80000	70000	60000	50000	40000	30000	20000
Probability of misuse	0.5	0.45	0.4	0.35	0.3	0.25	0.2	0.15	0.1
A's profit	90,000	89000	88000	84000	77000	70000	60000	48000	34000
B's profit	290,000	287000	264000	245000	222000	195000	164000	129000	90000
C' profit	140,000	139500	136000	128000	119000	107500	92000	73500	52000

Since I did not give you details on consumer surplus or demand curve, you should also ignore consumer surplus. Assume if customer information is misused, its cost to society is worth $100000. (a) How much quantity each firm will sell? What is the net social benefit (firm profits - social cost of misuse) at those quantities? (3) (b) The "committee for data protection" recommends a mandated standard (the maximum quantity of products each firm can sell). What is the optimal mandated standard? (3) (c) Since you have taken this course, you know that mandated standards are problematic. You go to the committee and tell them that by tax might be a better alternative. Can you show that a tax per 10000 units sold produces a better social outcome? ( you need to find the optimal tax amount, which may require you to do some trial and error. You may also like to think in terms of marginal social cost selling additional quantities)