ECO320 Exam Questions and Verified Answers/Accurate Solutions| Already Graded A+
Gun control is politically unpopular in neighborhoods with the highest crime rates. Use
economics to explain why. Criminals obtain guns to make crime easier and apprehension
more difficult, so guns tend to create crime. The potential victims of crime obtain guns to make
their victimization harder and more risky for criminals, so guns can also tend to reduce crime.
The standard argument is that the more handguns, the more violent crime. However, if
criminals know that honest citizens have guns, they might be increasingly wary of committing
crime. This muddies the direction of causation between handguns and crime. Perhaps, more
handguns lead to less crime so if this is true, then reducing the number of handguns may lead
to an increase in the amount of crime.
Both casual and some detailed evidence suggest that increase in handgun ownership have no
simple causal connection to violent crime.
If homeowners can legally own handguns, then potential burglars will be less likely, all other
things being equal, to invade houses in which som
For burglary, the victim's loss usually exceeds the injurer's gain, but the opposite is true for
breach of contract. Why? What are the implications for relative dollar values of compensation
and punishment? In breach of contract, damages are generally assessed on the basis of
compensation, not punishment. For breach of contract, perfect compensation is a sum of
money that leaves the victim indifferent between the breach of contract with compensation
and no breach of contract.
A rational agent would only breach the contract if they could gain more than would be
necessary to fully compensate the principal to the point of indifference between performance
and breach. Because we can reasonably expect sophisticated business actors to be rational, we
would only expect breach to occur in such situations, necessarily making the injurer's gain
greater than the victim's loss.
In the case of burglary, the probability of being caught and punished lowers the expected
payoff to the injurer. Even if the person valued the object only at its resale value (i.e. attached
no personal significance to the item stolen and no damage was done to
In what ways do you think a "rent-a-judge" who seeks to maximize income might decide cases
differently from an independent public judge? The parties can agree to "rent" a retired
judge to decide their case. The resulting private trial is usually held in a mutually convenient
place, such as a hotel suite. The retired judge usually conducts the trial in an informal manner,
without the concern for procedure shown in public trials. The case is decided by application of
,the relevant state law. The judge's final decision is, furthermore, registered with the state court
and has the full effect of a decision in a public court. Critics say that "rent-a-judge" is unfair to
the poor because only the rich can use it. People who rent judges benefit from a speedy trial,
and others benefit indirectly from relieving the congestion in the public courts. Notice that
renting a judge changes judicial motivation. Suppose you were a retired judge who decided to
participate in a rent-a-judge program. In your former role as a public judge, you were supposed
to be "independen
Suppose "loser pays all" is more efficient than "each pays his own." In a jurisdiction that follows
"each pays his own,'' the Cease Theorem would predict that the two parties would sign a
contract requiring the loser to reimburse the winner, thus adopting the more efficient rule by
private agreement. Give some economic reasons why this does not occur in fact. If the
jurisdiction allows for "each pays his own", rational parties would not want to engage in
another private agreement regarding costs which would increase both of the parties'
transaction costs.
The transaction costs for the parties of bargaining around the default rule might inhibit this deal
from occurring. Recognize that for most parties litigation is not so common that they can
develop boilerplate to deal with this situation. For most parties, litigation is uncommon. (The
average American consults a lawyer only three times during a lifetime.) And many people may
well be overly optimistic about their abilities to prevail at trial, thus inclining them not to want
to bargain away from the default of "loser pays."
Suppose that the seller is very attached to her home and wishes to sell only to someone who
will maintain the property as a single family dwelling. A prospective buyer says that he, too,
wants to use the property as a single-family dwelling. The sale is completed, and the seller
moves out. However, several days later, she learns that the buyer intended all along to
demolish the house in order to open a commercial establishment. Does efficiency commend
enforcing the contract or rescinding it? It would generally be efficient to enforce the
contract since the house was clearly more valuable to the purchaser than to the seller.
This is a case of fraud since a false assertion was made with the intention to deceive. Under the
traditional common law doctrine, the victim of fraud is entitled to damages for harm caused by
fraud.
The economic reason for not enforcing a promise elicited by fraud is straightforward: if parties
to a contract know that fraud is a ground for voiding the agreement, then they can rely on
truthfulness of the information developed in negotiations for the contract. This saves parties
, the costs of verifying material statements. This in turn, lowers the costs of concluding
cooperative agreements.
As such, the law should be designed such that they aim to improve the exchange of information
in private contracts. Enforcing these regulations can be costly. Consequently, legislation
directed at a
"Default rules save transaction costs in direct proportion to their efficiency." Explain this
proposition. (TT1, Oct 2017) When a court rules to fill a gap in a contract, the rules apply by
default. If the parties opt out of the default rules by explicit terms, the court enforces the
explicit terms even though they contradict the default terms that the court would have used to
fill the gap.
When a default rule is inefficient, the parties can gain by replacing it with their own explicit
terms that are efficient. This is the Coase Theorem.
The parties have to bear the transactions costs relating to this negotiation of explicit terms.
If the court supply efficient default terms, then neither party can gain further from replacing
them with explicit terms. The fewer the terms requiring negotiation, the less transaction costs.
So in general, all parties to a contract can benefit when lawmakers replace inefficient default
terms with efficient default terms, and the size of the gain is proportional to the cost of
transacting around the defaul
Analyze caps and limitations on litigation awards using the analysis of rent control (rent control
is from chapter 2) Caps and limitations on litigation awards can be associated with the
principle of rent control in that a "price ceiling" can be used as protection against excessive
litigation fees taking from the losing party.
-if the cap is set below market price there will be excess demand for houses and not enough
supply --> price floor
-similarly, if the cap is set too low there will be more demand for damages because more
crimeis committed if the cap on damages is lower than it should be. not enough supply of
damage awards and so plaintiffs will seek for alternative damage awards like punitive damages
"Excessive damages increase expected liability under a negligence rule, which results in excess
precaution." Explain the mistake in this proposition. When potential defendants know they
are subject to any of the negligence systems, including simple negligence, modest errors
Gun control is politically unpopular in neighborhoods with the highest crime rates. Use
economics to explain why. Criminals obtain guns to make crime easier and apprehension
more difficult, so guns tend to create crime. The potential victims of crime obtain guns to make
their victimization harder and more risky for criminals, so guns can also tend to reduce crime.
The standard argument is that the more handguns, the more violent crime. However, if
criminals know that honest citizens have guns, they might be increasingly wary of committing
crime. This muddies the direction of causation between handguns and crime. Perhaps, more
handguns lead to less crime so if this is true, then reducing the number of handguns may lead
to an increase in the amount of crime.
Both casual and some detailed evidence suggest that increase in handgun ownership have no
simple causal connection to violent crime.
If homeowners can legally own handguns, then potential burglars will be less likely, all other
things being equal, to invade houses in which som
For burglary, the victim's loss usually exceeds the injurer's gain, but the opposite is true for
breach of contract. Why? What are the implications for relative dollar values of compensation
and punishment? In breach of contract, damages are generally assessed on the basis of
compensation, not punishment. For breach of contract, perfect compensation is a sum of
money that leaves the victim indifferent between the breach of contract with compensation
and no breach of contract.
A rational agent would only breach the contract if they could gain more than would be
necessary to fully compensate the principal to the point of indifference between performance
and breach. Because we can reasonably expect sophisticated business actors to be rational, we
would only expect breach to occur in such situations, necessarily making the injurer's gain
greater than the victim's loss.
In the case of burglary, the probability of being caught and punished lowers the expected
payoff to the injurer. Even if the person valued the object only at its resale value (i.e. attached
no personal significance to the item stolen and no damage was done to
In what ways do you think a "rent-a-judge" who seeks to maximize income might decide cases
differently from an independent public judge? The parties can agree to "rent" a retired
judge to decide their case. The resulting private trial is usually held in a mutually convenient
place, such as a hotel suite. The retired judge usually conducts the trial in an informal manner,
without the concern for procedure shown in public trials. The case is decided by application of
,the relevant state law. The judge's final decision is, furthermore, registered with the state court
and has the full effect of a decision in a public court. Critics say that "rent-a-judge" is unfair to
the poor because only the rich can use it. People who rent judges benefit from a speedy trial,
and others benefit indirectly from relieving the congestion in the public courts. Notice that
renting a judge changes judicial motivation. Suppose you were a retired judge who decided to
participate in a rent-a-judge program. In your former role as a public judge, you were supposed
to be "independen
Suppose "loser pays all" is more efficient than "each pays his own." In a jurisdiction that follows
"each pays his own,'' the Cease Theorem would predict that the two parties would sign a
contract requiring the loser to reimburse the winner, thus adopting the more efficient rule by
private agreement. Give some economic reasons why this does not occur in fact. If the
jurisdiction allows for "each pays his own", rational parties would not want to engage in
another private agreement regarding costs which would increase both of the parties'
transaction costs.
The transaction costs for the parties of bargaining around the default rule might inhibit this deal
from occurring. Recognize that for most parties litigation is not so common that they can
develop boilerplate to deal with this situation. For most parties, litigation is uncommon. (The
average American consults a lawyer only three times during a lifetime.) And many people may
well be overly optimistic about their abilities to prevail at trial, thus inclining them not to want
to bargain away from the default of "loser pays."
Suppose that the seller is very attached to her home and wishes to sell only to someone who
will maintain the property as a single family dwelling. A prospective buyer says that he, too,
wants to use the property as a single-family dwelling. The sale is completed, and the seller
moves out. However, several days later, she learns that the buyer intended all along to
demolish the house in order to open a commercial establishment. Does efficiency commend
enforcing the contract or rescinding it? It would generally be efficient to enforce the
contract since the house was clearly more valuable to the purchaser than to the seller.
This is a case of fraud since a false assertion was made with the intention to deceive. Under the
traditional common law doctrine, the victim of fraud is entitled to damages for harm caused by
fraud.
The economic reason for not enforcing a promise elicited by fraud is straightforward: if parties
to a contract know that fraud is a ground for voiding the agreement, then they can rely on
truthfulness of the information developed in negotiations for the contract. This saves parties
, the costs of verifying material statements. This in turn, lowers the costs of concluding
cooperative agreements.
As such, the law should be designed such that they aim to improve the exchange of information
in private contracts. Enforcing these regulations can be costly. Consequently, legislation
directed at a
"Default rules save transaction costs in direct proportion to their efficiency." Explain this
proposition. (TT1, Oct 2017) When a court rules to fill a gap in a contract, the rules apply by
default. If the parties opt out of the default rules by explicit terms, the court enforces the
explicit terms even though they contradict the default terms that the court would have used to
fill the gap.
When a default rule is inefficient, the parties can gain by replacing it with their own explicit
terms that are efficient. This is the Coase Theorem.
The parties have to bear the transactions costs relating to this negotiation of explicit terms.
If the court supply efficient default terms, then neither party can gain further from replacing
them with explicit terms. The fewer the terms requiring negotiation, the less transaction costs.
So in general, all parties to a contract can benefit when lawmakers replace inefficient default
terms with efficient default terms, and the size of the gain is proportional to the cost of
transacting around the defaul
Analyze caps and limitations on litigation awards using the analysis of rent control (rent control
is from chapter 2) Caps and limitations on litigation awards can be associated with the
principle of rent control in that a "price ceiling" can be used as protection against excessive
litigation fees taking from the losing party.
-if the cap is set below market price there will be excess demand for houses and not enough
supply --> price floor
-similarly, if the cap is set too low there will be more demand for damages because more
crimeis committed if the cap on damages is lower than it should be. not enough supply of
damage awards and so plaintiffs will seek for alternative damage awards like punitive damages
"Excessive damages increase expected liability under a negligence rule, which results in excess
precaution." Explain the mistake in this proposition. When potential defendants know they
are subject to any of the negligence systems, including simple negligence, modest errors
