QUESTION 2 BILATERAL PRECAUTION Consider the following setting of bilateral precaution. Bicyclists who ride at night can reduce the risk of getting hit by a car by wearing reflective vests. Drivers can reduce the risk of hitting a bicyclist by installing HID (High Intensity Discharge) headlights, which are brighter than normal headlights. Imagine there's only one driver and one bicyclist, and the likelihood of an accident is as follows: Injurer Precaution [Normal HID Headlights Headlights Victim Precaution No Vest 8% 3% Vest 5% 1% The harm done by an accident is $1,000, and compensation is perfect. Reective vests cost $15, and HID bulbs cost $30. There is no insurance drivers bear their own liability costs. (a) What is the efficient level of precaution by both sides? (N o calculus needed, just compute the total social cost expected cost of accidents plus precaution under the four possible combinations.) (b) What levels of precaution by both parties will a rule of no liability lead to? (c) What levels of precaution will a rule of strict liability lead to? ((1) Show that, regardless of what the bicyclist does, it's efcient for the driver to use HlD bulbs; and regardless of what the driver does, it's efcient for the bicyclist to wear a vest. (e) What levels of precaution would a rule of simple negligence lead to? (i) What levels of precaution would a rule of strict liability with a defense of contributory negligence lead to? (g) Who bears the residual risk of accidents (pays the cost of those accidents that still occur) under simple negligence? What about under strict liability with a defense of contributory negligence? (h) What can you say about the levels of driver and bicyclist activity under these two rules