Question
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
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) Identify the socially efficient level of precaution, x*. Draw a graph to illustrate your answer. 2) Consider the strict liability rule. a) What level of precaution will the injurer choose if the court awards full compensation to the victim? b) How does your answer to a) change if the court systematically under-compensates the victim. Specifically, find out the injurer's optimal care when the injurer's liability conditional on an accident's actually occurring is and = 0.729. 3) 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.
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