Legal Studies 145 - Law and Economics I P ROBLEM S ET #2 Two individuals, A and B, own neighboring single family houses which share a common driveway. The driveway is in poor condition and needs repairs. Repairs can be made in five different levels or doses. The cost of each dose of repair is $25. The benefit of repair to each individual is as follows: 0 doses: individual benefit = $ 0 1 dose : individual benefit = $ 40 2 doses: individual benefit = $ 70 3 doses: individual benefit = $ 90 4 doses: individual benefit = $ 100 Four doses completely repair the road; additional doses provide no additional benefits. The individuals must bargain to decide how many doses of road repair each individual purchases. 1. Draw and complete a 5x5 matrix (Matrix 1) which shows the net benefit (benefit minus cost) to individuals A and B for all possible combinations of doses from 0 to 4. Each cell of the matrix should indicate the payoff to each party. 2.
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