ECO 320 AFTER TEST 2 UPDATED
ACTUAL Exam Questions and CORRECT
Answers
Why is a trial economically inferior to a settlement on the same terms as the expected trial
judgment? - CORRECT ANSWER A simple measure of the social costs combines
administrative costs and costs of errors. Administrative
costs are the sum of the costs to everyone involved in passing through the stages of a legal
dispute,
such as the costs of filing a legal claim, exchanging information with the other party, bargaining
in an
attempt to settle, litigating, and appealing.
The administrative costs of the settlement are much lower than those of a trial. Consequently, the
settlement saves social costs. In general, settlements that copy the results of trials reduce the
social
costs of resolving disputes.
Transaction costs as private costs are also part of social costs as well. Transaction costs are also
lower
in a settlement than those of a trial.
Questions 10.3 - CORRECT ANSWER EVT = (0.5)($100) + (0.5)(0) - $40 = $10
EVB = (0.7)($50) + (0.3)($10) = $38
EVC = (0.7)($50.00) + (0.3)($38 - $3.30) = 45.4
Net Profit = 45.4 - 10 = 35.4
T = Trial
B = Bargain
C = Claim
, Net Profit = Claim - Trial
Example 3 at the beginning of this chapter concerns whether a judge should order a divorcing
couple to attempt mediation before beginning a trial. Assume that false optimism causes trials
and predict whether compulsory mediation would cause more disputes to be settled without trial.
- CORRECT ANSWER This involves applying the game theory model of settlement set out
in chapter 10,
emphasizing that false optimism, does not precluded settlement, but narrows the threat
points of the parties so that the probability of settlement decreases.
Mediation is a non-binding settlement pushing parties to make settlements. It often happens
for unions. Compulsory mediation might cause more disputes to be settled without a trial.
There is no guarantee that a compulsory mediation will compel involuntary information -
but it presents an opportunity for the opposite side to disclose evidence voluntarily helpful to
its case.
Assume that discovery increases the optimism of plaintiffs and thus increases the value of
their legal claims. Explain the consequences for the number of claims filed.ƒdd - CORRECT
ANSWER If for individual proceedings, discoveries come after the claim is filed, the number
of claims is unaffected.
But if claimants anticipate successful discoveries - this increases relative optimism bias and more
claims will be filed.
Discovery increases deliberation, which improves the quality of argument. However,
discovery reduces spontaneity, and spontaneous answers by witnesses are sometimes more
revealing than considered answers. ("When desperate, tell the truth.") A complete economic
theory of discovery would thus model the trade-off between deliberation and spontaneity
in revealing the truth. Describe some considerations that you think would go into modeling
this trade-off. - CORRECT ANSWER In favour of deliberation:
(1)The voluntary pooling of information avoids trials, and avoiding trials saves administrative
costs.
ACTUAL Exam Questions and CORRECT
Answers
Why is a trial economically inferior to a settlement on the same terms as the expected trial
judgment? - CORRECT ANSWER A simple measure of the social costs combines
administrative costs and costs of errors. Administrative
costs are the sum of the costs to everyone involved in passing through the stages of a legal
dispute,
such as the costs of filing a legal claim, exchanging information with the other party, bargaining
in an
attempt to settle, litigating, and appealing.
The administrative costs of the settlement are much lower than those of a trial. Consequently, the
settlement saves social costs. In general, settlements that copy the results of trials reduce the
social
costs of resolving disputes.
Transaction costs as private costs are also part of social costs as well. Transaction costs are also
lower
in a settlement than those of a trial.
Questions 10.3 - CORRECT ANSWER EVT = (0.5)($100) + (0.5)(0) - $40 = $10
EVB = (0.7)($50) + (0.3)($10) = $38
EVC = (0.7)($50.00) + (0.3)($38 - $3.30) = 45.4
Net Profit = 45.4 - 10 = 35.4
T = Trial
B = Bargain
C = Claim
, Net Profit = Claim - Trial
Example 3 at the beginning of this chapter concerns whether a judge should order a divorcing
couple to attempt mediation before beginning a trial. Assume that false optimism causes trials
and predict whether compulsory mediation would cause more disputes to be settled without trial.
- CORRECT ANSWER This involves applying the game theory model of settlement set out
in chapter 10,
emphasizing that false optimism, does not precluded settlement, but narrows the threat
points of the parties so that the probability of settlement decreases.
Mediation is a non-binding settlement pushing parties to make settlements. It often happens
for unions. Compulsory mediation might cause more disputes to be settled without a trial.
There is no guarantee that a compulsory mediation will compel involuntary information -
but it presents an opportunity for the opposite side to disclose evidence voluntarily helpful to
its case.
Assume that discovery increases the optimism of plaintiffs and thus increases the value of
their legal claims. Explain the consequences for the number of claims filed.ƒdd - CORRECT
ANSWER If for individual proceedings, discoveries come after the claim is filed, the number
of claims is unaffected.
But if claimants anticipate successful discoveries - this increases relative optimism bias and more
claims will be filed.
Discovery increases deliberation, which improves the quality of argument. However,
discovery reduces spontaneity, and spontaneous answers by witnesses are sometimes more
revealing than considered answers. ("When desperate, tell the truth.") A complete economic
theory of discovery would thus model the trade-off between deliberation and spontaneity
in revealing the truth. Describe some considerations that you think would go into modeling
this trade-off. - CORRECT ANSWER In favour of deliberation:
(1)The voluntary pooling of information avoids trials, and avoiding trials saves administrative
costs.
