Firms has direct costs of production of 10 per unit sold (thats the marginal cost). Each product sold has risk of causing harms to a third party (not the buyer). The risk of an accident that will cause a loss of 100 will depend on whether firms take care in the manufacture process. The exercise of care raises the marginal cost by 2 (total marginal cost is then 12) and lowers the probability of an accident from 9% to 3%. The cost of care (per unit manufactured) and probability of harms are below:

Care Level	Cost of Care	Probability of Harms
None	0	9%
Care	2	3%

Firms sell output in a perfectly competitive market. The market consists of 5 consumers with values of the product:

Customer	Utility (value)
A	40
B	20
C	17
D	13
E	11

Assume initially (questions 1-11) that customers have perfect knowledge about the risk and harms of any product being sold. The last questions explicitly relax that assumption.

1. When manufacturing this product, is it efficient for the firm to provide "care" or "no care"?

Group of answer choices

No care

Care

2. Assuming the level of care is chosen at the efficient level, what is the efficient quantity of output?

Group of answer choices

1

3

4

2

5

0

3. Victims are Strangers: (Questions 3 through 7)

Assume that the victims of accidents are third parties (not the buyers or sellers of the good).

Suppose there is no liability for harms.

What level of care does the manufacturer provide? [ Select ] ["No care", "Care"]

What is the market price? [ Select ] ["10", "12", "19", "15"]

How many customers purchase the good? [ Select ] ["4", "0", "5", "3", "2", "1"]

Is this efficient? [ Select ] ["the quantity sold is efficient, but the level of care is not", "yes, the quantity sold and level of care is at the efficient levels", "the level of care is efficient but the quantity is no efficient", "no, the quantity sold and level of care are both inefficient"]

4. Assume that the victims of accidents are third parties (not the buyers or sellers of the good).

Suppose the firms are held to a negligence rule of liability for harms where the "due care" standard is to provide "care".

What level of care does the manufacturer provide? [ Select ] ["Care", "No care"]

What is the market price? [ Select ] ["15", "12", "10", "19"]

How many customers purchase the good? [ Select ] ["0", "1", "4", "5", "2", "3"]

Is this efficient? [ Select ] ["the level of care is efficient, but the quantity sold is not", "yes, the quantity sold and level of care is at the efficient levels", "the quantity sold is efficient, but the level of care is not", "no, the quantity sold and level of care are both inefficient"]

5. Assume that the victims of accidents are third parties (not the buyers or sellers of the good).

Suppose the firms are strictly liable for harms.

What level of care does the manufacturer provide? [ Select ] ["no care", "care"]

What is the market price? [ Select ] ["15", "12", "19", "10"]

How many customers purchase the good? [ Select ] ["1", "4", "5", "3", "0", "2"]

Is this efficient? [ Select ] ["yes, the quantity sold and level of care is at the efficient levels", "the quantity sold is efficient, but the level of care is not", "no, the quantity sold and level of care are both inefficient", "the level of care is efficient, but the quantity sold is not"]

6. Assume that the victims of accidents are third parties (not the buyers or sellers of the good).

Suppose the customers are strictly liable for harms.

What level of care does the manufacturer provide? [ Select ] ["Care", "No care"]

What is the market price? [ Select ] ["12", "15", "19", "10"]

How many customers purchase the good? [ Select ] ["4", "3", "5", "0", "1", "2"]

7. Assume that the victims of accidents are third parties (not the buyers or sellers of the good).

Which of the following legal rule(s) lead to the efficient level of care and the efficient quantity sold? Select all that apply.

Group of answer choices

No Liability for buyers or sellers

Negligence rule for sellers

strict liability on buyers

strict liability on sellers