2. Pat crashed her car into Sam's car. Liability is not at issue. What is at issue is the extent of Sam's injuries. First, let's suppose that each party has the same expectations about the injuries. With 50% probability, the court will find injuries of $2000, and with 50% probability injuries of $6000. A trial will cost each party $1000 in legal costs.

(a) Calculate the threat point of i. Pat ii. Sam

(b) What is the cooperative surplus?

(c) Will they settle the case outside of court? Explain

(d) Suppose that surplus is split 50-50 between Pat and Sam if a deal is struck. Given your answer to (c), what are the expected payoffs to i. Pat ii. Sam

Now suppose that Sam has access to a medical report which details the extent of her injuries. Given this report, she now thinks she has a 90% chance of winning at trial. Pat does not have access to this information.

(e) Suppose Sam's lawyer makes the following claim: "Having this medical report in our pocket will be extremely good for us at trial, so we want to keep it secret from Pat." Is this statement correct? Explain.

Now suppose that Sam is misreading the medical report. That is, her optimism is false, and she misunderstands her odds of winning at trial.

(f) Which rule for paying legal costs will be more socially efficient, loser pays or everyone pays their own costs? Why?