18 Jun WHAT OBJECTIONS WOULD YOU MAKE TO THE CITY’S METHOD OF DAMAGE ESTIMATION?
Economics 439 Law, Economics & Statistics Fall 2016 Prof. Kathie Barnes Homework Assignment #2 DUE: Tuesday, September 20 at the beginning of class. Directions: Answer the questions below. Each answer will be 1-3 paragraphs, including any equations necessary. Show your work – that is, both describe what your calculations are in words, and show your calculations in the homework. In some cases, there is no “right” answer: the right answer is one that is well thought-out and carefully described. Excel versions of the data will be available on Blackboard. The handout with the background for each scenario and the questions is posted on Blackboard as well. Please type your descriptive answers; you can hand-write any equations. If you use Excel (or another statistical program) to perform the calculations, write down the formula you used as well as the answer the program provided. Answer the following questions: 1. Firestone tire recall Cost /unit Pr(tire tread separation) Loss if separation Expected Loss per unit Total Cost per unit Keep tires $0 0.004 $1,100,000 Recall Tires $800 0.001 $1,000,000 In 2002, Ford had to make the decision whether to recall firestone tires on its SUVs. The tires had a somewhat higher probability of failing than other tires: they were more likely to have the tread separate from the rim at high speeds, thus causing serious accidents. 700,000 cars were affected. Changing all four tires on each car cost $800. (a) Under a strict liability rule, what is optimal for Ford to do? (Recall or not). Explain. (b) Under a no liability rule, what is optimal for Ford to do? (Recall or not). Explain (c) Assuming perfect information, what will consumers who own a Ford product with firestone tires do under a no liability rule? 2. Derive the formula for the optimal amount of precaution for the victim, Xv, and for the injurer, Xi, when the liability rule is contributory negligence. That is, the rule is: A) If �! ≥ �∗, victim bears/pays for the harm, H. B) If �! < �∗ (injurer is negligent), then the compensation depends on the relative fault of the victim and injurer: a. If Victim is less than 50% at fault, Victim is compensated (1 − �!)�. Thus, if Victim is 10% at fault, Victim gets compensation � = (1 − .10)� = 0.9� or 90% of H. b. If Victim is more than 50% at fault, Victim is not compensated, so Victim bears the entire cost of the injury, H. 3. Parking Meter Heist (adapted from Finkelstein & Levin, Statistics for Lawyers, pp.7- 10). Data posted on blackboard. In the late 1970s, NYC owned and operated about 70,000 parking meters. Daily collections averaged about $50,000. In May 1978, Brinks, Inc. took over the contract to collect coins from Wells Fargo. On April 9, 1980, 5 collectors were arrested for stealing a portion of the parking meter change they were supposed to collect; they were later convicted of fraud (the $4500 they had stolen that day). The City terminated Brinks’ contract on April 9, and a new firm, CDC, took over coin collection. Three additional points may be useful: There was a gasoline shortage from May 1979 – December 1979. There was gasoline rationing from June 1979 – September 1979. There was a suburban commuter rail strike from June 1980 – August 1980 These facts may be useful because they may have impacted the number of cars that were parking during these time periods. In the data (available on Blackboard), “1-A” refers to a small group of meters (47 of them) right near City Hall (downtown) for which City workers always did the collection (never an outside firm). “# Cols” refers to the number of collection days, as the number of days parking was not free changed depending on the # of weekend days and holidays in a particular time period. A. As attorney for the City, what damage calculation would you make, assuming that the City seeks ONLY damages from the last 10 months before Brinks’ contract was cancelled (ie, June 1979-April 1980). B. As attorney for Brinks’. What objections would you make to the City’s method of damage estimation?
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