Consider the following example from class. Suppose you own a chain of grocery stores, where sometimes people slip. On average you have one slip a month that causes $20K in damage (so annual costs $240K). Customers could prevent damage by being more careful, at cost to them of $60K / year. Going to trial costs $5000. The efficient outcome is customers exercise caution. In class, we showed that when the law is inefficient, it is likely to be challenged. Now we will show that an efficient rule will not be challenged. In particular, suppose that the rule is that the customer is liable for the slip (the grocery does not have to pay damages). Suppose, as before, the probability of a rule change is 25%. If the court finds for the customer, there will be a precedent (rule change), and after that firms will be responsible for damages (i.e., they will have to pay damages). Suppose furthermore that a customer comes to court with an in jury of value $40K. Finally, suppose that we are only looking at payoffs for the next year, as in the example in the class notes. (a) Show that the value of the case to the customer without accounting for the value of the rule change is $5000. (b) Now suppose you consider the value of the rule change. In particular, the cus- tomer (representing all customers) will no longer have to pay the $60000 in costs of precaution if they win at trial. What is the value of the case now? (c) Show that the value of the case to the defendant without accounting for the value of the rule change is -$15K.

(d) Now consider that if it loses at trial, it will have to pay damages for future slips, which costs it $240K. What is the value of the case at trial now? (e) Comparing your answers in questions (2) and (3), explain whether or not you expect this case to go to trial.