Ask Question, Ask an Expert

+61-413 786 465

info@mywordsolution.com

Ask Managerial Economics Expert

Law and Economics Problem Set

Question 1: Legal Value of a Claim

The tree below is identical to the tree we saw in class.

1653_Figure.png

Questions:

a) Alter the figure so that a trial (but not the appeal) costs the plaintiff $40 instead of $20, and settlement is for $51 instead of $50. Solve recursively for the expected values of the legal claim by filing in the blanks at each stage. What is the plaintiff's expected net profit from filing a complaint.

b) In Europe, the party who loses at trial pays the litigation costs of the winner. Assume that the plaintiff in the preceding figure pays litigation costs of $40 if she loses at trial, and the plaintiff pays litigation costs of $0 if she wins. Re-compute the expected values of the legal claim under this assumption.

c) Change the figure above so that the plaintiff wins $40 (not $100) at trial with probability .5 (again, as in part a, assume that each party pays his or her own legal fees). A nuisance suit is one in which the expected value of trial is non-positive (EVT ≤ 0). Is this a nuisance suit?

Question 2: Pre-Trial Bargaining

An accident has occurred, causing $10,000 in harm to the victim. The amount of harm done is undisputed and easy to prove; punitive damages are not applicable, so any damage award would be for exactly $10,000.

This type of accident is governed by strict liability, so the injurer is legally responsible, but it may be difficult to prove in court that he caused the harm. The victim can hire a lawyer for $3,000 and go to trial, in which case he would have a 40% chance of winning. He could also hire an expert witness to testify. This would ensure victory at trial, but would cost an additional $10,000, for a total of $13,000. Going to trial costs the defendant (injurer) $5,000, regardless of whether the plaintiff (victim) hires an expert witness. Assume that neither party pays any legal expenses if an out-of-court settlement is reached.

Questions:

First, consider the usual American rule where each party pays its own legal fees.

a) If the case goes to trial, will the plaintiff hire an expert witness or not?

b) Calculate each party's threat value during pre-trial negotiations (again, this is the amount each party would get if they did not cooperate and instead went to trial).

c) Calculate the cooperative surplus.

d) Determine the settlement that would occur if the two parties agreed to divide the gains from cooperative evenly. In other words, what is a "reasonable solution?"

e) In this scenario, would the American rule lead to over-, under-, or efficient precaution on the part of the injurer?

Next, consider the usual British rule where the losing party pays both sides' legal fees (including the cost of the expert witness, if he was hired).

f) If the case goes to trial, will the plaintiff hire an expert witness?

g) Calculate each party's threat value during pre-trial negotiations

h) Calculate the cooperative surplus

i) Determine the settlement that would occur if gains from cooperation were divided evenly.

j) In this scenario, would the British rule lead to over-, under-, or efficient precaution on the part of the injurer?

Question 3: A Civil Dispute

Arthur alleges that Betty borrowed a valuable kettle and broke it, so he sues to recover its value, which is $300. The facts are very confusing. Betty contends that she did not borrow a kettle from Arthur; even if it is proved that she borrowed a kettle from Arthur, she contends it is not broken; even if it is proved that she borrowed a kettle from Arthur and that it is broken, she contends that she did not break it.

Assume that because the facts in the case are so unclear, Arthur and Betty independently believe that the chances of either side's winning in court are an even 50%. Further assume that litigation in small claims court will cost each party $50 and that the costs of settling out of court are nil. So, cooperation in this case is a matter of settling out of court and saving the cost of a trial. Non-cooperation in this case means trying the dispute.

Questions:

a) What is Arthur's threat value? (Again, this is the amount Arthur would get if he did not cooperate and instead went to trial).

b) What is Betty's threat value? (Again, this is the amount Betty would get if she did not cooperate and instead went to trial).

c) What is the non-cooperative value of the game (i.e., the sum of their threat values)?

d) What is the cooperative value of the game?

e) What is the cooperative surplus?

f) What would be a reasonable settlement? How much would Betty offer to pay Arthur?

Suppose that instead of both sides' believing that there is an even chance of winning, both sides are optimistic. Specifically, Arthur thinks that he will win with probability 2/3, and Betty thinks that she will win with probability 2/3.

g) What is Arthur's subjective threat value (what he believes he will get if they went to)?

h) What is Betty's subjective threat value (what she believes she will get if they went to trial)?

i) What is the putative cooperative surplus (Cooperative Value-Non-cooperative Value)?

j) Will the parties be able to reach a settlement?

Managerial Economics, Economics

  • Category:- Managerial Economics
  • Reference No.:- M92058278
  • Price:- $60

Guranteed 36 Hours Delivery, In Price:- $60

Have any Question?


Related Questions in Managerial Economics

Queuing theory in the public sectordiscussion queuing

Queuing Theory in the Public Sector Discussion: Queuing Theory and Wait Times For this Discussion, you dive deeper into the topic of queuing. To prepare: Review the Learning Resources for the week as they relate to the t ...

Question read three 3 academically reviewed articles on

Question: Read three (3) academically reviewed articles on managerial economics and complete the following activities: (500 words) 1. Summarize all three (3) articles. Please use your own words. No copy-and-paste 2. Disc ...

Assignment - portfolio project for the final project you

Assignment - Portfolio Project For the final project, you will create a case study based on a company of your choice. The case study should include at least 5 of the concepts that we have discussed. The case study should ...

I have long thought subway made a monster mistake in their

I have long thought Subway made a MONSTER mistake in their "$5 footlong" campaign, that showed the whole country that they could sell footlong subs for just $5. I think this decreased the value of their brand, and made t ...

Discussion explore applications of pert and cpm in the

Discussion: Explore Applications of PERT and CPM in the Public or Non-Profit Organizations PERT is typically used to manage very large projects. In terms of scale, think weapons systems, the development of interstate tra ...

Geographic information systems gisassignment short paper

Geographic Information Systems (GIS) Assignment: Short Paper: GIS In the early years of Geographic Information Systems (GIS) technology, mapping was largely limited to public works, and then in the 1990s and early 2000s, ...

Topic - cost benefit analysis cba discussion benefits and

Topic - Cost Benefit Analysis (CBA) Discussion: Benefits and Shortcomings of Cost Benefit Analysis As mentioned in the Weekly Introduction, cost benefit analysis is one of the most widely used of all public-sector manage ...

Simulation and agent-based modeling schelling t c 1971

Simulation and Agent-Based Modeling Schelling, T. C. (1971). Dynamic models of segregation. Journal of Mathematical Sociology, 1(2), 143-186. Seminal Retrieved from the Walden Library databases. Discussion: Agent-Based M ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Why might a bank avoid the use of interest rate swaps even

Why might a bank avoid the use of interest rate swaps, even when the institution is exposed to significant interest rate

Describe the difference between zero coupon bonds and

Describe the difference between zero coupon bonds and coupon bonds. Under what conditions will a coupon bond sell at a p

Compute the present value of an annuity of 880 per year

Compute the present value of an annuity of $ 880 per year for 16 years, given a discount rate of 6 percent per annum. As

Compute the present value of an 1150 payment made in ten

Compute the present value of an $1,150 payment made in ten years when the discount rate is 12 percent. (Do not round int

Compute the present value of an annuity of 699 per year

Compute the present value of an annuity of $ 699 per year for 19 years, given a discount rate of 6 percent per annum. As