9781118041581

Summary 659

Questions and Problems

1. A plaintiff is suing a defendant for $100,000. The cost of going to court
   is $15,000 for each side.
   a. The parties agree there is a 50 percent chance of the plaintiff’s
   winning the case. What is the range of mutually beneficial agreements
   that the parties might negotiate in an out-of-court settlement? What if
   each side believes itswinning chance is 60 percent?
   b. Suppose the damages are $200,000 and each side sees its winning
   chance at 60 percent. What are the prospects for an out-of-court
   settlement?
   c. Suppose the plaintiff is bringing a nuisance suit. The plaintiff has no
   chance of winning in court, and both sides know it. Would it be rational
   for the defendant to settle the case out of court nonetheless? Explain.
   What legal rules can you suggest that might serve to deter nuisance suits?


2. In labor negotiations, failure to reach a contract agreement frequently
   results in a labor strike or work slowdown. In each of the following
   situations, identify which side—labor or management—is better
   positioned to obtain favorable contract terms from the other.
   a. Demand for the firm’s products is booming, and the firm is earning
   record profits.
   b. The labor union has over $20,000 per worker in its strike fund.
   c. A recession in the region has led to increased unemployment.


3. The developer of a new shopping mall is negotiating the terms of a store
   lease with a sporting goods firm. The developer is pressing the store for
   an increase in monthly rent. The store offers to pay the developer 1
   percent of its first year’s revenues in return for a lower monthly rent, and
   the developer agrees. Why might this more complicated contract be
   mutually beneficial? Explain briefly.


4. Firm S supplies inputs to firm B. Because producing the input is quite
   complicated, some defects are inevitable. Firm S can reduce the rate of
   defects at a cost. In turn, defective parts lower firm B’s profits (because
   of lost sales and unhappy customers). The firms’ profits and costs (in
   thousands of dollars) are shown in the table.
   a. Should firm B insist on 0 percent defects? Why or why not?
   b. What level of product quality is part of an efficient agreement? Explain.

B’s Profit S’s Cost B’s Profit S’s Cost

0% Defects 100 80 6% Defects 50 25

2% Defects 86 58 8% Defects 26 20

4% Defects 72 37 10% Defects 24 16

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