Question

The following information is relevant for Questions 10-14. 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 that there is only one driver and one bicyclist, and the likelihood of an accident is as follows:

		Injurer's Precaution
		Normal Headlights	HID Headlights
Victim's Precaution	No Vest	8%	3%
	Vest	5%	1%

Assume that the damage done to the bicyclist by an accident is $1,000 and can be fully compensated by monetary damages. A reflective vest costs $15, and an HID bulb costs $30. There is no insurance – drivers bear their own liability costs.

Question 10

HomeworkUnanswered

The efficient level of precaution requires

A No vest and no HID lights

B Vest and no HID lights

C No vest and HID lights

D Both vest and HID lights

Question 11

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Under the rule of strict liability, the level of precaution for the bicyclist and the driver will be:

A No vest, no HID lights

B Vest, no HID lights

C No vest, HID lights

D Vest, HID lights

Question 12

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Consider the rule of simple negligence and suppose that the legally required standard is set optimally by the court. Then,
1) Under No Vest, No HID lights, the expected payoff of the injurer is and the expected payoff of the victim is .
2) Under Vest, No HID lights, the expected payoff of the injurer is and the expected payoff of the victim is .
3) Under No Vest, HID lights, the expected payoff of the injurer is and the expected payoff of the victim is .
4) Under Vest, HID lights, the expected payoff of the injurer is and the expected payoff of the victim is

Question 13

HomeworkUnanswered

Under the rule of simple negligence, the levels of precaution by the bicyclist and the driver are

A No vest, no HID lights

B Vest, no HID lights

C No vest, HID lights

D Vest, HID lights

Question 14

HomeworkUnanswered

Consider the rule of negligence with a defense of contributory negligence and suppose that the legally required standard for both parties is set optimally by the court. The levels of precaution by the bicyclist and the driver are

A No Vest, No HID lights

B Vest, No HID lights

C No Vest, HID lights

D Vest, HID lights

Answer 1

To solve the problem let us summarize the total cost under all 4 situations.This is shown in table below-

		Injurer's Precaution
		Normal headlights	HID headlights
Victim's Precaution	No Vest	8 % chances of accident. Expected Damage when car is on road = 92% × $0 + 8% × $1000= $80	3% chances of accident Expected damage + Precautionary cost = (97%×$0+3%×$1000)+$30=$60
	Vest	5% chances of accident Expected damage + Precautionary cost =(95%×$0+5%×$1000)+ $15 = $65	1% chances of accident Expected damage + Precautionary cost = (99%×$0+1%×$1000)+$15+$30=$55

A 10. ) For an efficient level of precaution the Expected loss of the accident should be minimum. Therefore from above table we can see that the combination of vest and HID headlights leads to minimum expected loss at $55. So option D.

A 11.) Under rule of strict liability, the injurer will pay damage irrespective of whether the accident was intentional or non- intentional.So under this rule there is no need to prove whether the accident was committed out of negligence or mistake. Therefore even though chances of accident under normal headlights are higher compared to HID, the injurer will feel no inclination to take Precautionary measures. Further as the onus of damage lies entirely on the injurer victim will be fully compensated in any case. So victim will not take any Precautionary measure either. So no vest ,no HID.Therefore option A.

A 12.) Under rule of simple negligence payoffs are summarized in table below -

	HID lights	Normal lights
No Vest	($0, -$30)	( $1000, -$1000)
Vest	( -$15, -$30)	( $ 985, -$1000)

The first term in bracket is compensation to victim and second term is cost to driver.

1. So expected payoff under no vest no HID is

• Victim= 8% of $1000= 80
• Injurer = 8%of -1000=-80

2. So expected payoff under vest,but no HID is

• Victim= 5% of $985= 49.25
• Injurer = 5%of -1000= - 50

3. So expected payoff under no vest , HID is

• Victim= 0
• Injurer = 3% of -30 = -0.9

4.So expected payoff under both vest and HID is

• Victim= 1% of -$15= -0.15
• Injurer = 1%of -30=-10

A 13.) Under rule of simple negligence, if precaution is taken and accident occurs then injurer will not bear damages as it was a mistake not negligence.

However if precaution is not taken and accident happens then it was an act of negligence so injurer is liable for damages.

So if bicyclist do not wear vest but driver had HID lights on and if the accident occurs, bicyclist will not be compensated. Similarly if bicyclist had vest but driver did not have any HID lights and accident occurs then full damage has to be borne by the driver.

	HID lights	No HID lights
Total cost to driver if victim wears vest	$30	$1000
Net Compensation value to victim if victim wears vest	-$15	$1000-$15=$985
Total cost to driver if victim does not wear vest	$30	$1000
Net Compensation value to victim if victim does not wear vest	$0	$1000

Here driver will use HID lights and victim will wear vest as given by expected payoffs in A12.) So both vest and HID. So option D.

A14.) Under rule of negligence and defense of contributory negligence if the injurer maintains or not maintains level of precaution as per the optimal level set by court, and the victim was not taking any precautions either then the injurer will not be liable for damages if accident occurs. Here the injurer can defend itself on the grounds that victim was also negligent while on road by failing to take precautions.

	HID lights	No HID lights
Total cost to driver if victim wears vest	$1000+$30	$1000
Net Compensation value to victim if victim wears vest	$1000-$15=$985	$1000-$15=$985
Total cost to driver if victim does not wear vest	$0+$30	$0
Net Compensation value to victim if victim does not wear vest	$0	$0

Assuming both parties will try to optimize their payoffs so driver will put no HID and victim will wear vest. So option B.