<p>Economics 4550/5550 Homework #5 Dr. Michael Nieswiadomy Law and Economics Chapter 10 Due: Dec. 9, 2010</p><p>Answers must be typed. </p><p>1. (15 points) Working from the last possible event to the first possible event is called solving a problem “recursively.” The tree in Figure 10.4b is identical to Figure 10.4a, except that a trial costs the plaintiff $40 instead of $20 (notice that there is a typo in the figure here), and settlement is for $51 instead of $50. Solve recursively for the expected values of the legal claim by filling in the blanks at each stage in the tree. What is the plaintiff’s expected net profit from filing a legal complaint? Show your work.</p><p>2. (15 points) In Europe, the party who loses at trial pays the litigation cost of the winner. Assume that the plaintiff in the preceding figure pays litigation costs of $40 if she loses at trial, and the plaintiff pays litigation costs of $0 if she wins. Re-compute the expected values of the legal claim under this assumption. Show your work.</p><p>3. (15 points) From an economic viewpoint, restrictions on advertising by lawyers look like a device used by the bar to limit competition. From and economic standpoint, is advertising by lawyers any different from advertising by other professionals, such as accountants or insurers? Explain. </p><p>4. (15 points) Assume that false optimism causes trials and predict whether compulsory mediation in divorce cases would cause more disputes to be settled without trial. Explain.</p><p>5. (15 points) Assume that litigation will cost the plaintiff $100 and the defendant $100. Assume that settling out of court is free (SC=$0). What is the largest value of relative optimism (EJ) at which the parties can still settle out of court? Explain.</p><p>6. (15 points) Assume that the plaintiff demanded $1,000 to settle, the defendant rejects the offer, and jury awards $900 at trial. Who “won” for purpose of the rule of “loser pays all”? Explain.</p><p>7. (10 points) Will there be more nuisance suits under the rule of “each pays his own” or “loser pays all”? Explain.</p><p>1</p>