1. An accident causes harm of $1000 if it happens. However, here both the injure
ID: 1142033 • Letter: 1
Question
1. An accident causes harm of $1000 if it happens. However, here both the injurer and the victim can takeprecaution which reduces the probability of an accident. Precaution costs $40 for the victim and $80for the injurer. If neither take precaution, the probability of an accident is 10%. Precaution by either the injurer or victim (but not both) reduces the probability of accident to 5%. If both take precaution,the probability of accidents is zero.Note: In this problem, it is not sufficient to quote the results from class about what happens in each of these situations. You have to show me, using the numbers here, why those results hold.
(a) What is the efficient amount of precaution?
(b) What amount of precaution will theinjurer take under a rule of no liability? Is this efficient?
(c) What amount of precaution will the victim take under a rule of no liability? Is this efficient?
(d) What amount of precaution will theinjurertake under a rule of strict liability? Is this efficient?
(e) What amount of precaution will thevictim take under a rule of strict liability? Is this efficient?
(f) What amount of precaution will the injurer and victim take under a rule of simple negligence? Is this efficient? Your answer should involve finding the Nash equilibrium.
Explanation / Answer
Nash Equilibrium is a concept within game theory where the optimal outcome of a game is where there is no incentive to deviate from their initial strategy. More specifically, the Nash Equilibrium is a concept of game theory where the optimal outcome of a game is one where no player has an incentive to deviate from his chosen strategy after considering an opponent's choice. Overall, an individual can receive no incremental benefit from changing actions, assuming other players remain constant in their strategies. A game may have multiple Nash Equilibria or none at all.
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