Law and Economics Exam 1 Fall 2024

Which of the following legal systems is built on interpretation of the law itself, and commentary which clarifies its meaning?  

a. Common law

b. Civil law

c. Criminal law

d. Customary Law

e. A and B

b. Civil law

Which of the following is likely to exhibit negativeexternalities?

a. National defense against nuclear attacks

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

c. A person choosing what to watch on Netflix, alone by themselves

d. Getting vaccinated against a contagious disease

e. A and D

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

 Consider the following preferences: Assume that I am presented with a choice between Coca Cola and Pepsi.  I am unable to decide whether I like Coca Cola better than Pepsi, Pepsi better than Coca Cola, or if I am indifferent to the two. Which property of rational preferences does this violate (if any)?

a. Transitivity

b. Reflexivity

c. Commutativity

d. Completeness

e. This set of preferences does not violate any property of rational preferences.

d. Completeness

Recall the two fox hunting rules: (1) Post (the guy who established the fox hunt) gets the dead fox; or (2) Pierson (the guy who shot and killed the fox) gets the dead fox. Which of the following is/are correct:

a. “Pierson gets the fox” is a “bright line” property rule, which makes property rights clear and bargaining easier

b. “Post gets the fox” is a “bright line” property rule, which makes property rights clear and bargaining easier

c. “Post gets the fox”, while more complicated to enforce, avoids the incentive to infringe upon other people’s hunts 

d. A and C are both true

e. None of these are true

d. A and C are both true

Questions 5-7 refer to the following: Imagine that Mike and Walter live next to each other (and have no other neighbors).  Mike would like to have a birthday party that will be loud and last late into the night.  Walter would like to get a good night’s sleep, which will be interrupted if Mike throws such a party. Imagine that Mike values the party at $200, and Walter values a good night’s sleep at $300.  Further imagine that the current allocation of rights is that Mike has a right to party. Assuming that Coaseian bargaining is possible, which of the following is the most likely outcome of negotiations?

a. Mike purchases the right to party from Walter for $175

b. Mike purchases the right to party from Walter for $250

c. Walter purchases the right to a good night’s sleep from Mike for $250

d. Mike and Walter do not engage in trade for the right to party/a good night’s sleep.

e. A and B are both plausible, and the Coase theorem does not tell us which is more likely.

c. Walter purchases the right to a good night’s sleep from Mike for $250

Questions 5-7 refer to the following: Imagine that Mike and Walter live next to each other (and have no other neighbors).  Mike would like to have a birthday party that will be loud and last late into the night.  Walter would like to get a good night’s sleep, which will be interrupted if Mike throws such a party. Imagine that Mike values the party at $200, and Walter values a good night’s sleep at $300.  Further imagine that the current allocation of rights is that Mike has a right to party. How much cooperative surplus is available to Mike and Walter?

a. $0

b. $50

c. $75

d. $100

e. $200

d. $100

Questions 5-7 refer to the following: Imagine that Mike and Walter live next to each other (and have no other neighbors).  Mike would like to have a birthday party that will be loud and last late into the night.  Walter would like to get a good night’s sleep, which will be interrupted if Mike throws such a party. Imagine that Mike values the party at $200, and Walter values a good night’s sleep at $300.  Further imagine that the current allocation of rights is that Mike has a right to party. Is it efficient, in the sense used in this class, for Mike to have a party?

a. Yes

b. No

c. There is not enough information to know whether or not it is efficient

b. No

Which of the following statements is true?

a. The normative Hobbes approach says “Structure the law so as to minimize transaction costs and lubricate bargaining.”

b. The normative Kaldor-Hicks approach says “Structure the law so as to minimize transaction costs and lubricate bargaining.”

c. The normative Coase approach says “It doesn’t matter how you structure the law, private agreements will always lead to efficient outcomes.”

d. The normative Hobbes approach says “Structure the law so as to minimize the harm done by failures in private agreements.”

e. C and D are both right

d. The normative Hobbes approach says “Structure the law so as to minimize the harm done by failures in private agreements.”

Which of the following statements is true?

a. All Kaldor-Hicks improvements are also Pareto improvements

b. All Pareto improvements are also Kaldor-Hicksimprovements

c. All Kaldor-Hicks improvements are not Paretoimprovements, but could be made into Paretoimprovements with a transfer of cash

d. All Coaseian improvements are not Pareto improvements, but could be made into Pareto improvements with a transfer of cash.

e. B and C are both true

e. B and C are both true

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. The presence of many potential sellers of a commodity good

d. The presence of positive externalities

e. These are all sources of inefficiency

c. The presence of many potential sellers of a commodity good

For questions 11-17, consider the following scenario: A farmer and rancher live close to each other.  Their property boundaries are well defined, but there is no physical barrier, 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 $60 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 $50 in lost profits each year.  Suppose that there are no transaction costs between the farmer and the rancher, and that the farmer and rancher are successfully able to engage in Coasian bargaining.  Lastly, assume for now that if there are “farmer’s rights,” they are protected via damages. If there are “farmer’s rights,” where does Coase predict that the fence will 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 11-17, consider the following scenario: A farmer and rancher live close to each other.  Their property boundaries are well defined, but there is no physical barrier, 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 $60 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 $50 in lost profits each year.  Suppose that there are no transaction costs between the farmer and the rancher, and that the farmer and rancher are successfully able to engage in Coasian bargaining.  Lastly, assume for now that if there are “farmer’s rights,” they are protected via damages. If there are farmers’ rights, which of the following is the most likely outcome of Coasian bargaining?

a. The rancher builds a fence around his own property at a cost of $100 (and does not receive a payment from the farmer).

b. The rancher pays for the farmer to build a fence and makes an additional side payment of $5 to the farmer.

c. The rancher pays $50 to the farmer, and no one builds a fence

d. The rancher pays $0 to the farmer, and no one builds a fence

e. C and D are equally plausible outcomes, and the Coase theorem does not tell us which one is more likely to occur.

c. The rancher pays $50 to the farmer, and no one builds a fence

For questions 11-17, consider the following scenario: A farmer and rancher live close to each other.  Their property boundaries are well defined, but there is no physical barrier, 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 $60 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 $50 in lost profits each year.  Suppose that there are no transaction costs between the farmer and the rancher, and that the farmer and rancher are successfully able to engage in Coasian bargaining.  Lastly, assume for now that if there are “farmer’s rights,” they are protected via damages. If there are ranchers’ rights, which of the following is the most likely outcome of Coasian bargaining?

a. The rancher builds a fence around his own property at a cost of $100 (and does not receive a payment from the farmer).

b. The rancher pays for the farmer to build a fence and makes an additional side payment of $5 to the farmer.

c. The rancher pays $50 to the farmer, and no one builds a fence

d. The rancher pays $0 to the farmer, and no one builds a fence

e. C and D are equally plausible outcomes, and the Coase theorem does not tell us which one is more likely to occur.

d. The rancher pays $0 to the farmer, and no one builds a fence

For questions 11-17, consider the following scenario: A farmer and rancher live close to each other.  Their property boundaries are well defined, but there is no physical barrier, 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 $60 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 $50 in lost profits each year.  Suppose that there are no transaction costs between the farmer and the rancher, and that the farmer and rancher are successfully able to engage in Coasian bargaining.  Lastly, assume for now that if there are “farmer’s rights,” they are protected via damages. Now suppose that rather than doing $50 worth of damage, wandering cattle will do $200 worth of harm.  If there are farmer’s rights, which of the following is the most likely outcome of Coasian bargaining?

a. The rancher builds a fence around his own property at a cost of $100 (and does not receive a payment from the farmer).

b. The rancher pays for the farmer to build a fence and makes an additional side payment of $5 to the farmer.

c. The rancher pays for the farmer to build a fence and makes an additional side payment of $50 to the farmer.

d. The rancher pays $0 to the farmer, and no one builds a fence

e. B and C are equally plausible outcomes, and the Coase theorem does not tell us which one is more likely to occur.

b. The rancher pays for the farmer to build a fence and makes an additional side payment of $5 to the farmer.

For questions 11-17, consider the following scenario: A farmer and rancher live close to each other.  Their property boundaries are well defined, but there is no physical barrier, 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 $60 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 $50 in lost profits each year.  Suppose that there are no transaction costs between the farmer and the rancher, and that the farmer and rancher are successfully able to engage in Coasian bargaining.  Lastly, assume for now that if there are “farmer’s rights,” they are protected via damages. Now suppose that rather than being protected via damages, there are farmer’s rights that are protected by property rules (i.e. an injunction).  Which reflects the rancher’s threat point if negotiations break down? (You may assume that the cattle keep doing $200 worth of harm)

a. The rancher builds a fence around his own property at a cost of $100 (and does not receive a payment from the farmer).

b. The farmer builds a fence around his own property at a cost of $60 (and does not receive any payment from the rancher)

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

d. The rancher pays $200 to the farmer, and no one builds a fence

e. The rancher pays $0 to the farmer, and no one builds a fence

a. The rancher builds a fence around his own property at a cost of $100 (and does not receive a payment from the farmer).

For questions 11-17, consider the following scenario: A farmer and rancher live close to each other.  Their property boundaries are well defined, but there is no physical barrier, 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 $60 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 $50 in lost profits each year.  Suppose that there are no transaction costs between the farmer and the rancher, and that the farmer and rancher are successfully able to engage in Coasian bargaining.  Lastly, assume for now that if there are “farmer’s rights,” they are protected via damages. If Rule I is “Rancher’s Rights”; Rule II is “Farmer’s Rights protected via damages”; and Rule III is “Farmer’s Rights protected via an injunction” which of the following rankings of the farmer’s preferred remedies is accurate?

a. Rule I  Rule II Rule III

b. Rule III Rule II Rule I

c. Rule II Rule I Rule III

d. Rule III Rule I Rule II

e. There is no general ranki

b. Rule III Rule II Rule I

For questions 11-17, consider the following scenario: A farmer and rancher live close to each other.  Their property boundaries are well defined, but there is no physical barrier, 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 $60 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 $50 in lost profits each year.  Suppose that there are no transaction costs between the farmer and the rancher, and that the farmer and rancher are successfully able to engage in Coasian bargaining.  Lastly, assume for now that if there are “farmer’s rights,” they are protected via damages. If Rule I is “Rancher’s Rights”; Rule II is “Farmer’s Rights protected via damages”; and Rule III is “Farmer’s Rights protected via an injunction” which of the following rankings of the rancher’s preferred remedies is accurate?

a. Rule I  Rule II Rule III

b. Rule III Rule II Rule I

c. Rule II Rule I Rule III

d. Rule III Rule I Rule II

e. There is no general ranking l

a. Rule I  Rule II Rule III

Which of the following is a normative economic statement?

a. The current unemployment rate is 3.7%

b. Reducing taxes will lead to economic growth

c. The government should discourage income inequality

d. As unemployment increases, inflation decreases

e. These are all normative economic statements

c. The government should discourage income inequality

Calabresi and Melamed suggest which of the following?

a. When transaction costs are low, an injunction is more efficient than damages

b. When transaction costs are high, damages are more efficient than injunction

c. When transaction costs are low, damages are more efficient than injunction

d. Both A and B are true  

e. None of the above are true

d. Both A and B are true  

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 being easy to administer but the disadvantage of encouraging preemptive investment in possessory acts 

d. A and C are both true

e. B and C are both true

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

Questions 21-26 refer to the following scenario: Suppose that two firms lease property above a shared natural gas deposit, and have the rights to mine the minerals below their leased land.  The gas in the deposit is worth $100.  Each company can choose to either drill fast, which costs $30, or drill slowly, which costs $10. First imagine that if one firm drills fast and the other drills slowly, the fast driller will get 75% of the gas, and the slow driller gets the remaining 25%.  If they both drill the same speed, they each get 50% of the gas. Which of the following payoff matrices describes the game?  Firm 1’s payoff is listed first; Firm 2’s payoff is listed second.

A	Firm 2
Firm 1		Slow	Fast
	Slow	20,20	15,45
	Fast	45,15	40,40

 

B	Firm 2
Firm 1		Slow	Fast
	Slow	40,40	45,15
	Fast	15,45	20,20

 

C	Firm 2
Firm 1		Slow	Fast
	Slow	40,40	15,45
	Fast	45,15	20,20

 

D	Firm 2
Firm 1		Slow	Fast
	Slow	20,20	45,15
	Fast	15,45	40,40

E: None of the above matrices describe this game

C

Questions 21-26 refer to the following scenario: Suppose that two firms lease property above a shared natural gas deposit, and have the rights to mine the minerals below their leased land.  The gas in the deposit is worth $100.  Each company can choose to either drill fast, which costs $30, or drill slowly, which costs $10. What is the efficient outcome of the game described above?

a. (Slow, Fast)

b. (Slow, Slow)

c. (Fast, Slow)

d. (Fast, Fast)

e. B and D are both efficient

b. (Slow, Slow)

Questions 21-26 refer to the following scenario: Suppose that two firms lease property above a shared natural gas deposit, and have the rights to mine the minerals below their leased land.  The gas in the deposit is worth $100.  Each company can choose to either drill fast, which costs $30, or drill slowly, which costs $10. What is the Nash equilibrium of the game described above?

a. (Slow, Fast)

b. (Slow, Slow)

c. (Fast, Slow)

d. (Fast, Fast)

e. This game does not have a pure strategy Nash equilibrium

d. (Fast, Fast)

Questions 21-26 refer to the following scenario: Suppose that two firms lease property above a shared natural gas deposit, and have the rights to mine the minerals below their leased land.  The gas in the deposit is worth $100.  Each company can choose to either drill fast, which costs $30, or drill slowly, which costs $10. Moving from the outcome where both players drill fast to an outcome where one drills fast and one drills slowly is which of the following:

a. A Pareto improvement (but not a Kaldor Hicks improvement)

b. A Kaldor Hicks improvement (but not a Pareto improvement)

c. Both a Pareto improvement and a Kaldor Hicks improvement

d. Neither a Pareto improvement nor a Kaldor Hicks improvement.

b. A Kaldor Hicks improvement (but not a Pareto improvement)

Questions 21-26 refer to the following scenario: Suppose that two firms lease property above a shared natural gas deposit, and have the rights to mine the minerals below their leased land.  The gas in the deposit is worth $100.  Each company can choose to either drill fast, which costs $30, or drill slowly, which costs $10. Now imagine that no matter the speed that each firm drills, each has rights to 50% of the gas.  The costs of drilling remain unchanged. (The gas in the deposit is worth $100.  Each company can choose to either drill fast, which costs $30, or drill slowly, which costs $10). Which of the following payoff matrices describes the modified game?  Firm 1’s payoff is listed first; Firm 2’s payoff is listed second.

 

A	Firm 2
Firm 1		Slow	Fast
	Slow	40,40	40,20
	Fast	20,40	20,20

 

B	Firm 2
Firm 1		Slow	Fast
	Slow	40,40	20,40
	Fast	40,20	20,20

 

C	Firm 2
Firm 1		Slow	Fast
	Slow	20,20	40,20
	Fast	20,40	40,40

 

D	Firm 2
Firm 1		Slow	Fast
	Slow	20,20	20,40
	Fast	40,20	40,40

E: None of the above matrices describe this game

A

Questions 21-26 refer to the following scenario: Suppose that two firms lease property above a shared natural gas deposit, and have the rights to mine the minerals below their leased land.  The gas in the deposit is worth $100.  Each company can choose to either drill fast, which costs $30, or drill slowly, which costs $10. What is the Nash Equilibrium of the modified game?  (Listed as (Firm 1, Firm 2))

a. (Slow, Fast)

b. (Slow, Slow)

c. (Fast, Slow)

d. (Fast, Fast)

b. (Slow, Slow)

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

 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. 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. 

b. 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. 

c. The neighbors have to sue Atlantic Cement Co. every year to get new damages, if the nuisance behavior continues.

d. The neighbors have to pay Atlantic for their legal fees.

e. Atlantic Cement Co is judgement-proof

b. 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. 

Which of the following is the least likely to be interesting from an economic perspective?

a. The incentives that laws have to influence behavior

b. The ability of laws to affect people’s expectations of what will happen in the event of an incident

c. After an accident occurs, how much will the injurer have to pay the victim for damages?

d. Which policy is likely to lead to the most efficient outcome?

c. After an accident occurs, how much will the injurer have to pay the victim for damages?

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.

What factors are necessary to acquire property via adverse possession?​You must occupy the property for “long enough” and additionally….

a. The owner was unaware of your occupation

b. The occupation was adverse to the owner’s interests

c. The owner did not object or take legal action

d. All of the above are necessary

e. B and C are necessary (but not A)

 

e. B and C are necessary (but not A)

What is the term for the government’s ability to take private property for public use?

a. Ex parte rights

b. Eminent domain

c. Exempt property

d. Squatter’s rights

e. Adverse possession

b. Eminent domain

Under the right described in the previous question, what requirements must be met in order for the government to exercise this right (in the US and in most other countries)

a. Must be for public use

b. Must pay the landowner the fair market value

c. Must pay the landowner whatever he or she asks

d. A and B

e. A and C

d. A and B

What is the name for the method by which you solve dynamic games, and which always yields “reasonable” equilibria

a. Matrix method

b. Game tree

c. Backwards induction

d. Nash equilibrium

c. Backwards induction

What’s the name for the “reasonable” equilibria found using the above method?  These equilibria have the feature that at every stage, each player can count on the other players behaving rationally.

a. Trembling hand perfect Nash equilibrium

b. Dominant strategy Nash equilibrium

c. Mixed Strategy Nash equilibrium

d. Subgame perfect Nash equilibrium

e. Cournot equilibrium

d. Subgame perfect Nash equilibrium

Patents have which of the following tradeoffs?  (Below, the “first stage” is before the innovation occurs; the “second stage” is after innovation).

a. Patents discourage innovation in the first stage but allow increased total social welfare (and lower prices) in the second stage by allowing imitators

b. Patents discourage innovation in the first stage but allow decreased total social welfare (and higher prices) in the second stage by preventing imitators

c. Patents encourage innovation in the first stage but allow decreased total social welfare (and higher prices) in the second stage by preventing imitators

d. Patents encourage innovation in the first stage but allow increased total social welfare (and lower prices) in the second stage by allowing imitators

e. Patents don’t have any tradeoffs.

c. Patents encourage innovation in the first stage but allow decreased total social welfare (and higher prices) in the second stage by preventing imitators

“Fair Use” is a doctrine that covers which type of intellectual property (in the United States)

a. Patents

b. Copyright

c. Trade secrets

d. A and B only

e. A B and C

b. Copyright

Under the fair use doctrine, which of the following would be most likely to be allowed:

a. A professor copying a single newspaper article for use in her class without permission from the newspaper or the author.

b. A television station rebroadcasting a major league baseball game in its entirety without express written consent from the league.

c. A university science lab copying a patented process for gene editing without seeking permission from the patent holder.

d. A non-profit (charity) copying the McDonald’s logo for their literature without permission from McDonald’s.

e. None of these would be likely allowed under the fair use doctrine.

a. A professor copying a single newspaper article for use in her class without permission from the newspaper or the author.

What is the primary purpose of copyrights?

a. To reduce confusion over who made a product and allow companies to build a reputation for quality

b. To encourage innovation by granting an innovator a temporary monopoly on a product or process

c. To provide a property right over original expressions, which helps solve problems about private supply leading to undersupply of public goods

d. To protect a firm against misappropriation of private information by its employees

c. To provide a property right over original expressions, which helps solve problems about private supply leading to undersupply of public goods

What is the primary purpose of trademarks?

a. To reduce confusion over who made a product and allow companies to build a reputation for quality

b. To encourage innovation by granting an innovator a temporary monopoly on a product or process

c. To provide a property right over original expressions, which helps solve problems about private supply leading to undersupply of public goods

d. To protect a firm against misappropriation of private information by its employees

 

a. To reduce confusion over who made a product and allow companies to build a reputation for quality