PS2_answers - on whether A has undertaken any repairs...

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Legal Studies 145 - Law and Economics I Answers to P ROBLEM S ET #2 1. The matrix appears as follows: B 0 1 2 3 4 0 0,0 40,15 70,20 90,15 100,0 A 1 15,40 45,45 65,40 75,25 75,0 2 20,70 40,65 50,50 50,25 50,0 3 15,90 25,75 25,50 25,25 25,0 4 0,100 0,75 0,50 0,25 0,0 2. Any combination of choices that adds up to three doses maximizes aggregate benefits minus costs. These combinations are efficient. 3. With B's obligation, A is not compensated for any expenses she chooses to make, only for the difference between the benefits delivered by a good road and the benefits she receives from the current road. B can deliver these benefits to A in either of two ways: B can repair the road completely (i.e., insure that it has received four doses) or he can pay A cash. Which form of compensation is best from B's perspective depends
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Unformatted text preview: on whether A has undertaken any repairs independently. Suppose, for example, that A independently purchases 2 doses of repair. Then A receives at least $70 worth of benefits from the road. If B chooses not to purchase any doses of repair, he will owe $30; on the other hand, he too receives $70 worth of benefits from the 2 doses of repair. Thus, his net payoff from choosing 0 doses, given that A chooses 2 doses, is $40. The payoff matrix is below. (0,3) is the Nash equilibrium of this game. Note that A has a dominant strategy. B 0 1 2 3 4 0 100,-100 100,-45 100,-10 100,5 100,0 A 1 75,-20 75,15 75,30 75,25 75,0 2 50,40 50,55 50,50 50,25 50,0 3 25,80 25,75 25,50 25,25 25,0 4 0,100 0,75 0,50 0,25 0,0 4. In each of the three cases, a total of three doses of repair should be undertaken....
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