ECO320 Exam Questions and Verified Answers/Accurate Solutions| Already Graded A+
The law A law is a rule that may or may not have have economic consequences for an
individual
Profit maximization Marginal revenue = marginal cost.
Monopoly Natural (rare earth mines) or regulated (liquor)
Monopoly No close substitutes and market power
Division of Surplus A reasonable division of surplus gives each party an equal share
The process of bargaining establishing the threat values, determining the cooperative
surplus and terms for distributing the surplus.
Voluntary agreement Each party must obtain at least their threat value (max or min price) or
there is no advantage to cooperating
Coase Theorem When transaction costs are zero, an efficient use of resources results from
private bargaining, regardless of the legal assignment of property rights
The Open Range Rule (rancher's rights) The farmer is responsible for keeping the cattle off
of his property and bears the damages if the cattle got in
The Closed Range Rule (farmer's rights) The rancher is responsible for keeping the cattle off
the farm property and the rancher bears the damages if the cattle got in
, Which is rule is more efficient (closed or open?) Common law says rue 2, but either rule is
efficient provided transaction costs are zero. Its cheaper to build a fence around farmer's land
so rancher will pay for it
Invariance with 0 transactions costs, farmer fences cornfield rather than rancher fencing
ranch. Invariant version of coase theorem because the use of resources is invariant to the
assignment of property rights
transaction costs costs of the exchange. The exchange has three steps: search costs,
bargaining costs, and enforcement costs
Transaction costs and bargaining When transaction costs are high enough to prevent
bargaining, the efficient use of resources will depend on how property rights are assigned.
threshold High transaction costs, when bargaining fails, legal rights matter.
Low transaction costs, when bargaining succeeds, legal rights do not matter to efficiency (cost
theorem applies)
Normative Hobbes Theorem Structure the law so as to minimize the harm caused by failures
in private agreements. To minimize harm the law should allocate property rights to the party
who values them most.
Converse of Coase Theorem When transaction costs are high enough to prevent
bargaining, the efficient use of resources will depend on how property rights are assigned.
Normative Coase Theorem Minimize obstacles to private agreements over resource
allocation
damages, compensation When there are obstacles to cooperation (high transaction costs),
the more efficient remedy is compensatory money damages
The law A law is a rule that may or may not have have economic consequences for an
individual
Profit maximization Marginal revenue = marginal cost.
Monopoly Natural (rare earth mines) or regulated (liquor)
Monopoly No close substitutes and market power
Division of Surplus A reasonable division of surplus gives each party an equal share
The process of bargaining establishing the threat values, determining the cooperative
surplus and terms for distributing the surplus.
Voluntary agreement Each party must obtain at least their threat value (max or min price) or
there is no advantage to cooperating
Coase Theorem When transaction costs are zero, an efficient use of resources results from
private bargaining, regardless of the legal assignment of property rights
The Open Range Rule (rancher's rights) The farmer is responsible for keeping the cattle off
of his property and bears the damages if the cattle got in
The Closed Range Rule (farmer's rights) The rancher is responsible for keeping the cattle off
the farm property and the rancher bears the damages if the cattle got in
, Which is rule is more efficient (closed or open?) Common law says rue 2, but either rule is
efficient provided transaction costs are zero. Its cheaper to build a fence around farmer's land
so rancher will pay for it
Invariance with 0 transactions costs, farmer fences cornfield rather than rancher fencing
ranch. Invariant version of coase theorem because the use of resources is invariant to the
assignment of property rights
transaction costs costs of the exchange. The exchange has three steps: search costs,
bargaining costs, and enforcement costs
Transaction costs and bargaining When transaction costs are high enough to prevent
bargaining, the efficient use of resources will depend on how property rights are assigned.
threshold High transaction costs, when bargaining fails, legal rights matter.
Low transaction costs, when bargaining succeeds, legal rights do not matter to efficiency (cost
theorem applies)
Normative Hobbes Theorem Structure the law so as to minimize the harm caused by failures
in private agreements. To minimize harm the law should allocate property rights to the party
who values them most.
Converse of Coase Theorem When transaction costs are high enough to prevent
bargaining, the efficient use of resources will depend on how property rights are assigned.
Normative Coase Theorem Minimize obstacles to private agreements over resource
allocation
damages, compensation When there are obstacles to cooperation (high transaction costs),
the more efficient remedy is compensatory money damages
