For example, it might well settle a nuisance suit for $5,000 if it knows
that defending the suit will cost $10,000. The most immediate way to
deter nuisance suits is to make the losing party pay the other side’s
legal (i.e., court) costs.- Paying the developer 1 percent of the store’s first year’s revenue might
be beneficial for two reasons. First, if the parties are risk averse, this
arrangement is one way to share the risk of uncertain revenues. Second,
the arrangement might depend on different probability assessments of
the parties. For instance, the store may be relatively pessimistic (and the
developer may be optimistic) about the volume of shoppers coming to
the new mall. - a. Since the mill has the right to pollute, the fishery must pay it to clean up.
With 50 percent cleanup, the benefit to the fishery is 100,000 30,000
$70,000. The mill’s cost is $50,000, so the total net benefit (relative to no
cleanup) is $20,000. A 100 percent cleanup, however, costs more than it
is worth: $120,000 $100,000. Thus a 50 percent cleanup (at a price
between $50,000 and $70,000) is mutually beneficial.
b. The same 50 percent reduction would be negotiated if the fishery held
the legal right to clean water. Moving from 100 percent cleanup to 50
percent cleanup costs the fishery $30,000 in reduced profit, but saves the
mill $50,000 in abatement costs. Since the total net benefit from this
change is positive ($20,000), the parties can benefit mutually from the
cleanup. Here, the mill will pay the fishery an amount between $30,000
and $50,000. A further move to zero percent cleanup is not warranted.
(The fishery’s reduction in profit exceeds the mill’s cost saving.) - a. The eight possible agreements (and associated payoffs) are
- 95%, 3yr, w/o Bio.: 180, 140 2. 95%, 5yr, w/o Bio.: 100, 80
3. 80%, 3yr, w/o Bio.: 160, 90 4. 80%, 5yr, w/o Bio.: 60, 50
5. 95%, 3yr, w/Bio.: 150, 100 6. 95%, 5yr, w/Bio.: 70, 60
7. 80%, 3yr, w/Bio.: 130, 50 8. 80%, 5yr, w/Bio.: 30, 30
Only agreements 1, 3, 7, and 8 are efficient. Agreements 2, 4, and 6
are dominated by agreement 7. Agreement 5 is dominated by
agreement 3.
b. Agreement 7 is optimal since the parties’ total gains, (130 50), are
maximized.
- 95%, 3yr, w/o Bio.: 180, 140 2. 95%, 5yr, w/o Bio.: 100, 80
- a. The buyer maximizes BB PQ 3Q Q^2 /20 PQ. Therefore,
set MB 3 Q/10 P 0 and rearrange as P 3 Q/10 or Q
30 10P. This describes the buyer’s optimal purchase behavior as a
function of P.
b. To maximize profit, the seller sets MR MC. We derive MR from the
preceding price equation, P 3 Q/10; therefore, MR 3 Q/5.
30 Answers to Odd-Numbered ProblemsBMAns.qxd 9/26/11 11:18 AM Page 30