1.  The reasonable person standard in negligence

(a)  creates an incentive for all injurers to meet that standard to avoid liability for accidents.

(b) increases the activity level of all injurers compared to strict liability.

(c)  reduces the care level of individuals whose costs of care are slightly above average compared to strict liability.

(d)  is equivalent to strict liability for some persons whose costs of care are much higher than average.

(e)  increases the activity level of injurers compared to an individualized negligence standard.

2. Assuming all parties have identical costs of care, negligence and strict liability lead to the same number of accidents if

(a)  optimal victim care is zero and activity level changes are inefficient.

(b)  optimal injurer care is zero and activity level changes are efficient.

(c)  the efficient outcome requires the injurer to alter its activity level.

(d)  a defense of contributory negligence is added to both liability rules.

(e) victims can alter their activity levels at lower costs than injurers can alter their activity levels..

3. The statement that best describes the difference between protecting entitlements by property rights or by liability rules is:

(a)  the harm is greater from violating an entitlement protected by a property right than one protected by a liability rule.

(b)  both apply to high transaction cost settings but the remedy under a property right is an injunction while the remedy under a liability rule is damages.

(c) the cost of enforcing a property right exceeds the cost of enforcing a liability rule.

(d) property rights are good against all trespassers while liability rules apply only to parties unwilling to compensate victims in voluntary transactions.

(e) a property right approach assumes that a voluntary transaction is economical whereas a liability rule approach assumes that transactions costs prevent a voluntary transaction.

4. Assume B engaged in an ultrahazardous activity such as blasting is strictly liable for A’s damages. A’s total damages are $150 of which $50 would have occurred even if B had not been blasting. If B is strictly liable for $150 instead of $100 in damages, then

(a) A will take too little care relative to due care.

(b) B may not engage in blasting even though it is efficient to do so.

(c) A will have no incentive to alter its activity level which it would do if it only recovered $100.

(d) B may increase its level of blasting to compensate for the extra $50 damages it must pay.

(e) B will take care in excess of the due care level.

5. The economic rationale for the defense that the defendant in a product liability lawsuit has complied with the customary level of care of the industry is

(a) the accident victim has implicitly paid for that level of care and hence to award him damages for the injurer’s failure to take additional care would overcompensate him.

(b) it reduces the costs to courts of determining the injurer’s level of care.

(c) if the accident victim desired a different level of care, he would have negotiated for it.

(d) the customary level of care approximates due care for accidents arising out of a contract.

(e) all of the above.

6. The economic argument for holding a manufacturer vicariously liable for the intentional torts of its customers is the following:

(a) the manufacturer is in a better position to monitor its customers    actions than the victim of the tort.

(b) customers typically lack the wealth to pay for the damages they cause whereas manufacturers have deep pockets.

(c) enforcement resources are saved because it is cheaper to sue one manufacturer than many customers.

(d) the manufacturer will include its expected liability cost in the price of the product so customers, in effect, pay for their torts.

(e) customers are risk averse but firms tend to be risk neutral so that the cost of risk is eliminated by holding the manufacturer liable.

7. The statement that best describes the difference between negligence and comparative negligence is the following:

(a) Since both rules create incentives for injurers and victims to take due care, the principal difference between the two relates to distribution effects and administrative costs when both parties are negligent.

(b) Comparative negligence leads to a lower level of victim care than negligence because in the former a victim still recovers part of its damages even if he is contributorily negligence.

(c) Comparative negligence leads the parties to share more equally the costs of avoiding accidents which is beneficial for risk averse individuals.

(d) Negligence involves greater administrative costs than comparative negligence because in the former the court must decide both care levels and the amount of damages whereas in the latter it only has to apportion damages between the parties.

(e) Negligence is concerned with questions of economic efficiency while comparative negligence is concerned with distribution issues.