Law and Economics Exam #1

2. Which of the following is likely to exhibit positive externalities?

a. National defense

b. A pig farm that creates a bad odor for several miles in any direction

c. A person smoking cigarettes inside their own house, where they live alone

d. An airport that has loud airplane takeoffs and landings near a neighborhood

a. National defense

1. Common law is practiced where?
a. France
b. England
c. The United States
d. All of the above
e. B and C only

e. B and C only

3. What does it mean if an economist says a good is a "private good"

a. It is rivalrous and non-excludable

b. It non-rivalrous and non-excludable

c. It is non-rivalrous and excludable

d. It is rivalrous and excludable

e. It is owned by the government

d. It is rivalrous and excludable

4. Recall the two fox hunting rules: (1) "the guy who established the fox hunt gets the fox, and (2) "the guy who kills the fox gets it." Which of the following is true?

a. "The guy who established the fox hunt gets the fox" is a "bright line" property rule, which makes property rights clear and bargaining easier
b. "The guy who kills the fox gets it," while more complicated to enforce, avoids the incentive to infringe upon other people's hunts (and is thus more efficient)
c. "The guy who kills the fox gets it" is a "bright line" property rule, which makes property rights clear and bargaining easier
d. A and B are both true
e. None of these are true

c. "The guy who kills the fox gets it" is a "bright line" property rule, which makes property rights clear and bargaining easier

Questions 5-8 refer to the following: Adam, who lives in a small town, has a 1957 Chevy convertible in good repair. The pleasure of owning and driving this car is worth $4000 to Adam. Blair, who has wanted the car for years, inherits $7000 and decides to try to buy the car from Adam. After inspecting the car, Blair decides that the pleasure of owning it is worth $3000 to her.

5. If Adam and Blair are able to come to an agreement and Blair buys the car from Adam, the resulting outcome is known as:
a. Cooperative solution
b. Non-cooperative solution
c. Free-rider problem
d. Tragedy of the Commons

a. Cooperative solution

Questions 5-8 refer to the following: Adam, who lives in a small town, has a 1957 Chevy convertible in good repair. The pleasure of owning and driving this car is worth $4000 to Adam. Blair, who has wanted the car for years, inherits $7000 and decides to try to buy the car from Adam. After inspecting the car, Blair decides that the pleasure of owning it is worth $3000 to her.

6. A government agent taking Adam's car and giving it to Blair (with no money changing hands) would be which of the following
a. A Kaldor-Hicks improvement
b. A Pareto improvement
c. A Hobbesian improvement
d. A Coaseian improvement
e. None of the above

e. None of the above

Questions 5-8 refer to the following: Adam, who lives in a small town, has a 1957 Chevy convertible in good repair. The pleasure of owning and driving this car is worth $4000 to Adam. Blair, who has wanted the car for years, inherits $7000 and decides to try to buy the car from Adam. After inspecting the car, Blair decides that the pleasure of owning it is worth $3000 to her.

7. Which of the following is the most likely outcome of Blair's attempt to buy Adam's car?
a. Blair will buy the car from Adam for $5000
b. Blair will buy the car from Adam for $8000
c. Blair will buy the car from Adam for $4000
d. Blair will buy the car from Adam for $3500
e. Blair will not buy the car from Adam

e. Blair will not buy the car from Adam

Questions 5-8 refer to the following: Adam, who lives in a small town, has a 1957 Chevy convertible in good repair. The pleasure of owning and driving this car is worth $4000 to Adam. Blair, who has wanted the car for years, inherits $7000 and decides to try to buy the car from Adam. After inspecting the car, Blair decides that the pleasure of owning it is worth $3000 to her.

8. How much cooperative surplus is available to Adam and Blair?
a. $0
b. $1000
c. $2000
d. $3000
e. $4000

a. $0

9. I am in the market for a Globe Warnicke barrister cabinet (an antique piece of furniture). The cost of driving around to flea markets hoping to find one for sale is which type of transaction cost?
a. Search cost
b. Bargaining cost
c. Enforcement cost
d. Exchange cost
e. None of the above

a. Search cost

10. Suppose that I find a seller with such a cabinet available for purchase. They are asking $500, but I only want to pay $300. The cost of haggling over the appropriate price is which type of transaction cost?
a. Search cost
b. Bargaining cost
c. Enforcement cost
d. Exchange cost
e. None of the above

b. Bargaining cost

11. Suppose that the seller and I reach an agreement on price: $400. We also agree that I will pay her $40 per month for 10 months. The cost to her of collecting these payments is which type of transaction cost?
a. Search cost
b. Bargaining cost
c. Enforcement cost
d. Exchange cost
e. None of the above

c. Enforcement cost

12. Which of the following statements is true?
a. The normative Hobbes theorem says "Structure the law so as to minimize transaction costs and lubricate bargaining."
b. The normative Coase theorem says "Structure the law so as to minimize transaction costs and lubricate bargaining."
c. The normative Kaldor-Hicks theorem says "Structure the law so as to minimize transaction costs and lubricate bargaining."
d. The normative Coase theorem says "It doesn't matter how you structure the law, private agreements will always lead to efficient outcomes."
e. The normative Coase theorem says "Structure the law so as to minimize the harm done by failures in private agreements."

b. The normative Coase theorem says "Structure the law so as to minimize transaction costs and lubricate bargaining."

13. Which of the following scenarios probably has the highest transaction costs?
a. Purchasing an apple from a grocery store
b. Purchasing a computer from the Apple store
c. Purchasing 1000 barrels of oil on the spot market (i.e. right now)
d. Purchasing 1000 barrels of oil on the futures market (e.g. six months from now).
e. All these transaction costs are likely the same.

d. Purchasing 1000 barrels of oil on the futures market (e.g. six months from now).

14. Which of the following statements is true?

a. All Kaldor-Hicks improvements are also Pareto improvements
b. All Pareto improvements are also Kaldor-Hicks improvements
c. All Pareto improvements are not Kaldor-Hicks improvements, but could be made into Kaldor-Hicks improvements with a transfer of cash
d. All Kaldor-Hicks improvements are not Pareto improvements, but could be made into Pareto improvements with a transfer of cash.
e. B and D are both true

e. B and D are both true

Questions 15 -17 refer to the following: The market for used cars has two types of cars: high quality and low quality. Each type is equally common (each quality level represents ½ of the cars available for purchase on the used car market). Buyers are willing to pay $16,000 for a high-quality car and $4,000 for a low-quality car. Sellers of a high-quality car would be willing to sell it for $14,000, and sellers of a low-quality car would be willing to sell it for $2,000. Assume that both buyers and sellers are risk neutral, and that while the seller knows what quality of car s/he has, the buyer cannot tell the difference between high and low quality cars.

15. What is the buyer's average valuation of these cars?
a. $15,000
b. $10,000
c. $8,000
d. $3,000

b.$10,000

Questions 15 -17 refer to the following: The market for used cars has two types of cars: high quality and low quality. Each type is equally common (each quality level represents ½ of the cars available for purchase on the used car market). Buyers are willing to pay $16,000 for a high-quality car and $4,000 for a low-quality car. Sellers of a high-quality car would be willing to sell it for $14,000, and sellers of a low-quality car would be willing to sell it for $2,000. Assume that both buyers and sellers are risk neutral, and that while the seller knows what quality of car s/he has, the buyer cannot tell the difference between high and low quality cars.

16. What is the seller's average valuation of these cars?
a. $15,000
b. $10,000
c. $8,000
d. $3,000

c. $8,000

Questions 15 -17 refer to the following: The market for used cars has two types of cars: high quality and low quality. Each type is equally common (each quality level represents ½ of the cars available for purchase on the used car market). Buyers are willing to pay $16,000 for a high-quality car and $4,000 for a low-quality car. Sellers of a high-quality car would be willing to sell it for $14,000, and sellers of a low-quality car would be willing to sell it for $2,000. Assume that both buyers and sellers are risk neutral, and that while the seller knows what quality of car s/he has, the buyer cannot tell the difference between high and low quality cars.

17. Which of the following trades might reasonably occur?
a. High-quality cars at $15,000
b. Low-quality cars at $3,000
c. Average-quality cars at $9,000
d. All of the above might reasonably occur
e. A and B

b. Low-quality cars at $3,000

For questions 18-21, consider the following scenario: A farmer and rancher live close to each other. Their property boundaries are well defined, but there is no physical boundary, so the rancher's cattle may wander onto the farmer's property and cause damage to the farmer's crops. Suppose that the farmer can build and maintain a fence around his crops for $50 per year, while the rancher can build and maintain a fence around his ranch for $100 per year. Further suppose that if there is no fence, the rancher's wandering cattle will cause the farmer $40 in lost profits each year. Suppose that there are no transaction costs between the farmer and the rancher.

18. If there are "farmer's rights," where will the fence be built?
a. Around the farmer's crops
b. Around the rancher's ranch
c. Around both the ranch and the crops
d. There won't be a fence

d. There won't be a fence

For questions 18-21, consider the following scenario: A farmer and rancher live close to each other. Their property boundaries are well defined, but there is no physical boundary, so the rancher's cattle may wander onto the farmer's property and cause damage to the farmer's crops. Suppose that the farmer can build and maintain a fence around his crops for $50 per year, while the rancher can build and maintain a fence around his ranch for $100 per year. Further suppose that if there is no fence, the rancher's wandering cattle will cause the farmer $40 in lost profits each year. Suppose that there are no transaction costs between the farmer and the rancher.

19. If there are "rancher's rights," where will the fence be built?
a. Around the farmer's crops
b. Around the rancher's ranch
c. Around both the ranch and the crops
d. There won't be a fence

d. There won't be a fence

For questions 18-21, consider the following scenario: A farmer and rancher live close to each other. Their property boundaries are well defined, but there is no physical boundary, so the rancher's cattle may wander onto the farmer's property and cause damage to the farmer's crops. Suppose that the farmer can build and maintain a fence around his crops for $50 per year, while the rancher can build and maintain a fence around his ranch for $100 per year. Further suppose that if there is no fence, the rancher's wandering cattle will cause the farmer $40 in lost profits each year. Suppose that there are no transaction costs between the farmer and the rancher.

20. If there are farmers' rights, which of the following is the most likely outcome?
a. The rancher pays for the fence and makes and additional side payment of $25 to the farmer.
b. The rancher pays for the fence and makes and additional side payment of $50 to the farmer.
c. The rancher pays for the fence but does not make an additional side payment.
d. The rancher does not pay for the fence and pays the farmer $40.
e. The farmer does not build a fence and receives nothing from the rancher.

d. The rancher does not pay for the fence and pays the farmer $40.

For questions 18-21, consider the following scenario: A farmer and rancher live close to each other. Their property boundaries are well defined, but there is no physical boundary, so the rancher's cattle may wander onto the farmer's property and cause damage to the farmer's crops. Suppose that the farmer can build and maintain a fence around his crops for $50 per year, while the rancher can build and maintain a fence around his ranch for $100 per year. Further suppose that if there is no fence, the rancher's wandering cattle will cause the farmer $40 in lost profits each year. Suppose that there are no transaction costs between the farmer and the rancher.

21. If there are ranchers' rights, which of the following is the most likely outcome?
a. The rancher pays for the fence and makes and additional side payment of $25 to the farmer.
b. The rancher pays for the fence and makes and additional side payment of $50 to the farmer.
c. The rancher pays for the fence but does not make an additional side payment.
d. The rancher does not pay for the fence and pays the farmer $40T
e. The farmer does not build a fence and receives nothing from the rancher.

e. The farmer does not build a fence and receives nothing from the rancher.

22. Now suppose that the cattle cause $200 worth of damage. If there is a farmer's rights regime, which of the following is the most likely?
a. The rancher pays for the fence and makes and additional side payment of $25 to the farmer.
b. The rancher pays for the fence and makes and additional side payment of $50 to the farmer.
c. The rancher pays for the fence but does not make an additional side payment.
d. The rancher does not pay for the fence and pays the farmer $200.
e. The farmer does not build a fence and receives nothing from the rancher.

a. The rancher pays for the fence and makes and additional side payment of $25 to the farmer.

23. Which of the following is one of the fundamental economic questions of property law?
a. What is the most efficient system of transferring ownership from one person to another?
b. What is the socially optimal price of a piece of property?
c. How do we resolve disputes about property ownership?
d. What things may be owned?
e. Both C and D.

e. Both C and D.

24. Which of the following tends to lead to inefficiencies in markets?
a. The presence of many buyers and sellers in a commodity market?
b. Complete information on the part of buyers
c. Complete information on the part of sellers
d. The presence of taxes
e. All of the above cause inefficiencies

d. The presence of taxes

25. What does it mean if a game features a Prisoner's Dilemma?
a. There is not a Nash equilibrium
b. There are multiple Nash equilibria
c. The game must be about prisoners bargaining with a prosecutor
d. The Nash equilibrium is Kaldor-Hicks dominated by at least one other outcome
e. The Nash equilibrium is Pareto dominated by at least one other outcome

e. The Nash equilibrium is Pareto dominated by at least one other outcome

26. What is risk neutrality?
a. When people place a higher value on things they own than they would place on those things if they did not own them
b. When people place a lower value on things they own that they would place on those same things if they did not own them.
c. When people prefer more-risky gambles to less-risky gambles
d. When people prefer less-risky gambles to more-risky gambles.
e. When people are exactly indifferent between a more-risky gamble and a less-risky gamble, so long as they have the same expected value.

e. When people are exactly indifferent between a more-risky gamble and a less-risky gamble, so long as they have the same expected value.

30. Now assume that the farmers come up with an idea to institute property rights. They establish a system that would cost c to everyone who plays by the rules (farms), but would give a penalty P to anyone who is steals. (Assume that if they enact this system, everyone who steals will get caught 100% of the time). Which of the following values of P and c will work to achieve the cooperative outcome?
a. P = 2, c = 10
b. P = 7, c = 5
c. P = 10, c = 20
d. P = 20, c = 10
e. None of these values will achieve the cooperative outcome

d. P = 20, c = 10

31. What are the two principles for establishing ownership of fugitive property?
a. Tied ownership and the principle of accession
b. First possession and possessory acts
c. Tied ownership and first possession
d. First possession and "finders keepers"

c. Tied ownership and first possession

32. Which of the following is not a type of intellectual property protection?
a. Patents
b. Copyrights
c. Trademarks
d. Trade secrets
e. These are all types of intellectual property protection

e. These are all types of intellectual property protection

33. In class, we listened to a song that faced a copyright dispute involving sampling of an Egyptian song, "Khosara Khosara." What song did we listen to?
a. Trap Queen
b. Big Pimpin'
c. Blurred Lines
d. Gold Digger
e. Hey Ya!

b. Big Pimpin'

34. How long does a patent currently last in the United States

a. 70 years after the death of the creator (120 for corporate works)
b. 20 years after the death of the creator
c. 20 years after filing for the patent
d. 20 years after filing for the patent, or after finishing FDA approval, whichever is longer.
e. Indefinitely so long as the patent holder is actively defending it

c. 20 years after filing for the patent

35. How long does a copyright currently last in the United States

a. 70 years after the death of the creator (120 for corporate works)
b. 20 years after the death of the creator
c. 20 years after filing for the copyright
d. 20 years after filing for the copyright, or after finishing FDA approval, whichever is longer.
e. Indefinitely so long as the copyright holder is actively defending it

a. 70 years after the death of the creator (120 for corporate works)

36. How long does a trademark currently last in the United States

a. 70 years after the death of the creator (120 for corporate works)
b. 20 years after the death of the creator
c. 20 years after filing for the trademark
d. 20 years after filing for the trademark, or after finishing FDA approval, whichever is longer.
e. Indefinitely so long as the trademark holder is actively defending it

e. Indefinitely so long as the trademark holder is actively defending it

37. Trademark holders must worry about genericization of their trademark—losing it because the trademarked name has become the generic name for the product. Which of the following products has lost its trademark in the United States?

a. Asprin
b. Tylenol
c. Kleenex
d. Xerox
e. Band-Aid

a. Asprin

38. Suppose that you're hiking in the woods and there's an unexpected snowstorm. You're cold, hungry, and lost, and it's getting dark. If you stay outside, you might freeze to death overnight. You notice a small cabin, with no one in it. You try the door but it's locked. You break the lock, take some food, light a fire in the fireplace, and sleep in one of the beds. In the morning, the owners come to the cabin, and call the police. Which of the following is true, based on the ruling in Ploof v. Putnam?

a. You can't be charged with trespassing and you don't need to reimburse the owners for damages (broken door, stolen food and firewood)
b. You can't be charged with trespassing but you do need to reimburse the owners for damages.
c. You can be charged with trespassing and you need to reimburse the owners for damages.
d. You can be charged with trespassing but you don't need to reimburse the owners for damages
e. The case of Ploof v. Putnam can't tell us anything about how a court would rule in the above scenario.

b. You can't be charged with trespassing but you do need to reimburse the owners for damages.

39. In the case of Boomer v. Atlantic Cement Co., the Court ruled for the neighbors and ordered Atlantic Cement Co. to pay them permanent damages, paid as servitude to the land. What does this mean?

a. The neighbors have to sue Atlantic Cement Co. every year to get new damages, if the nuisance behavior continues.
b. Atlantic Cement Co. has paid damages and it allowed to continue its nuisance behavior in perpetuity, but only as to the current neighbors. If a homeowner sells his/her home to a new person, the new neighbor is allowed to collect damages from Atlantic.
c. Atlantic Cement Co. has paid damages and it allowed to continue its nuisance behavior in perpetuity. If a homeowner sells his/her home to a new person, the new neighbor is NOT allowed to collect damages from Atlantic.
d. The neighbors have to pay Atlantic for their legal fees.

c. Atlantic Cement Co. has paid damages and it allowed to continue its nuisance behavior in perpetuity. If a homeowner sells his/her home to a new person, the new neighbor is NOT allowed to collect damages from Atlantic.

40. What is the term for the government's right (in most countries) to seize property from a private landowner if the owner doesn't want to sell?
a. Exempt assets
b. Regulatory takings
c. Eminent domain
d. Manifest destiny

c. Eminent domain

Normative hobbes theorem

structure the law so as to minimize harm caused by failures in private agreements

Which of the following is not a source of inefficiency in markets?

a.     The presence of sales taxes

b.     Sellers and buyers having asymmetric information about the good being bought/sold

c.     Barriers to trade

d.     The presence of negative externalities

e.     These are all sources of inefficiency

e.     These are all sources of inefficiency

Nash Equilibrium

strategy profile such that no player can improve his payoff by switching to a different action (given what everyone else is going) (usually the fourth in the 4×4 chart)

1.     What of the following are required to have rational preferences?

a.     Preferences must be transitive

b.     Preferences must be commutative

c.     Preferences must be reflexive

d.     All of the above

e.     A and C only

e.     A and C only

Which of the following legal systems is built on historical norms and precedents? 

a.     Common law

b.     Civil law

c.     Criminal law

d.     Customary Law

e.     A and B

a.     Common law

What of the following statements about patents are true?

a.     Patents are the only way to encourage innovation

b.     Patents encourage innovation but cause deadweight loss in the form of monopoly power

c.     Patents are granted to protect artistic expression

d.     All of the above are true

e.     B and C are true

b.     Patents encourage innovation but cause deadweight loss in the form of monopoly power

1.  What elements are not required in order for a patent application to be approved?

a.     The invention must be novel

b.     The invention must be non-obvious

c.     The invention must have practical utility (in other words, be commercializable)

d.     The invention must be of a product available for consumers to purchase

All of these are required in order for a patent application to be approved

d.     The invention must be of a product available for consumers to purchase

 

Which of the following describe the tradeoffs between laws that grant property rights based on first possession versus rules that grant property rights based on tied ownership?

a.     First possession rules have the advantage of being easy to administer but the disadvantage of discouraging preemptive investment in possessory acts.

b.     First possession rules have the advantage of being easy to administer. But the disadvantage of encouraging preemptive investment in possessory acts.

c.     Tied ownership rules have the advantage of avoiding preemptive investment but the disadvantage of being costly to administer

d.     A and C are both true

e. B and C are both true

e. B and C are both true

Questions 26 and 27 refer to the following scenario. Imagine a scenario where there is a power plant that creates pollution (call them the “polluter”) and a neighbor who is bothered by the pollution (the “neighbor”). “No remedy” means that the polluter has the right to pollute; “injunction” means that the neighbor has an entitlement to no pollution, protected by an injunction; “damages” means that the neighbor has an entitlement to no pollution, protected by damages that exactly compensate for the harm done.

Which of the following rankings of the polluter’s preferred remedies is true?

a. no remedy ≥ injunction ≥ damages

b. damages ≥ injunction≥ no remedy

c. no remedy ≥ damages ≥ injunction

d. injunction ≥ damages ≥ no remedy

c. no remedy ≥ damages ≥ injunction

Which of the following rankings of the neighbor’s preferred remedies is true?

a. no remedy ≥ injunction ≥ damages

b. damages ≥ injunction≥ no remedy

c. no remedy ≥ damages ≥ injunction

d.injunction ≥ damages ≥ no remedy

e. There is no general ranking like this

Questions 26 and 27 refer to the following scenario. Imagine a scenario where there is a power plant that creates pollution (call them the “polluter”) and a neighbor who is bothered by the pollution (the “neighbor”). “No remedy” means that the polluter has the right to pollute; “injunction” means that the neighbor has an entitlement to no pollution, protected by an injunction; “damages” means that the neighbor has an entitlement to no pollution, protected by damages that exactly compensate for the harm done.

d.injunction ≥ damages ≥ no remedy

Which of the following is one of the fundamental economic questions of property law?

a.     How are property rights established

b.     What can an owner do with her property?

c.     How do we resolve disputes about property ownership?

d.     What things may be privately owned?

e.     All of the above

e.     All of the above

Which of the following is most likely to be interesting to an economist (as opposed to an attorney or a party to the litigation)

a.     After an accident has happened, is the defendant liable for injuries he caused?

b.     After an accident has happened, how much money damages are owed to the plaintiff (person who was injured)?

c.     Before an accident happens, how will rules around liability affect the injurer and victim’s decisions and, in turn, accident rates?

d.     Both A and B

e.     A, B, and C are equally likely to be interesting to an economist

c.     Before an accident happens, how will rules around liability affect the injurer and victim’s decisions and, in turn, accident rates?