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Suppose that there are two consumers {A, B} who derive benefits
from consuming one unit of a dangerous product. Consumer A derives
total benefits of $200 and consumer B derives total benefits of
$100. The risk of an accident from consuming the product is .01,
and the damages from an accident are $5,000. Finally, the firm’s
marginal cost of producing the product is constant at $75 and the
market is perfectly competitive.

Is it efficient for the firm to produce and sell the product to
consumer A? (Enter “Yes” or “No”)

Is it efficient for the firm to produce and sell the product to
consumer B? (Enter “Yes” or “No”)

Suppose that both consumers (and the firm) correctly perceive the
risk of an accident.

What is the price of the product under a rule of no liability?
(Please enter a whole number.)

What is the price of the product under a rule of strict
liability? (Enter a whole number.)

Based on the information above, which of the following is
true?

No liability yields the efficient outcome.

Strict liability yields the efficient outcome.

Neither no liability nor strict liability yield the efficient
outcome.

Both no liability and strict liability yield the efficient
outcome.   

Now suppose that both consumers A and B misperceive the risk of
an accident to be .001, but the firm correctly perceives the risk
of an accident to be .01.

What is the perceived net benefit of consumption to
consumer A under no liability? (Please enter a whole number.)

What is the perceived net benefit of consumption to
consumer B under no liability? (Enter a whole number.)

What is the price of the product under a rule of no liability?
(Enter a whole number.)

What is the perceived net benefit of consumption to
consumer A under strict liability? (Enter a whole number.)

What is the perceived net benefit of consumption to
consumer B under strict liability? (Enter a whole number.)

What is the price of the product under a rule of strict
liability? (Enter a whole number.)  

(When calculating perceived net benefits, do not consider the
price of the product.)

Based on the above-referenced misperception of risk, which of
the following is true?

No liability yields the efficient outcome.

Strict liability yields the efficient outcome.

Neither no liability nor strict liability yield the efficient
outcome.

Both no liability and strict liability yield the efficient
outcome.