1. In the late 1900's, no-fault divorce laws became the norm. Before no-fault divorce, the only way to obtain a divorce was to prove that the divorce was somebody's fault. Possible reasons included infidelity, abuse, etc. What effect did no-fault divorce have on the implicit price of divorce? What effect would this have on the quantity of marriages and divorces? Draw a graph. Assume that both marriages and divorces are "goods."
2. Assume that in a remote but beautiful valley, a chicken farm is located next to a hotel. There are no other businesses or residences in the valley. Unfortunately for the hotel, the chicken farm produces an extremely noxious odor. Due to this odor, the hotel loses approximately $1 million in business annually.
(a) Are property rights being violated in this case?
Assume that the hotel can reduce the odor by building huge glass enclosures over the pool and tennis courts and by erecting large fans to divert the odors away from the hotel. Assume these measures would annually cost $800,000. Alternatively, the chicken farm can install fans and filters in its barns. These measures would annually cost $300,000.
(b) If transaction costs are 0, would an assignment of property rights by a court have any effect on the efficient allocation of resources? Explain and discuss all relevant theorems.
(c) Would the assignment of property rights have any effect on the distribution of resources? Explain.
(d) Now assume that the owners of the chicken farm and hotel fail to reach an agreement. How should the property rights be assigned by the courts in this case? Explain.
(e) Finally assume the hotel goes public, and approximately 1000 investors buy shares of the hotel's stock. Due to an increase in the number of owners of the hotel, transactions costs increase to $600,000. Can a private agreement still be worked out? Explain.
3. Assume we have 2 persons, John and Jill. Assume John owns land that he values at $10,000. Assume Jill has $20,000 in cash, and she values John's land at $15,000.
(a) What are John's and Jill's respective threat values?
(b) What is the value of a cooperative solution?
(c) What is the value of a noncooperative solution?
(d) Assume a third party (Jack) offers John $12,000 for the land. How does Jack's bid change the threat values, the surplus from cooperation, and the reasonable solution?
4. A rancher and a farmer live next door to one another. Although the boundaries of their properties are well-defined, there is no fence or natural break that clearly demarcates the boundaries. As a result, from time to time the rancher's cattle stray onto the farmer's property. Assume both earn profits of $500 per year. Assume that if the rancher's cattle stray onto the farmer's property, the farmer loses $160 in profits per year. The annual cost to the rancher of building and maintaining a fence between his property and the farmer's is $120. The annual cost to the farmer of building and maintaining a fence between his property and the rancher's is $95. Assume that the transaction costs between the rancher and the farmer are zero.
(a) From an economy efficiency standpoint, which party should be granted the property rights? Why?
(b) Assume private bargaining fails. What are the two remedies available to the court? Which remedy is the most efficient? Why?
(c) Construct a table illustrating all of the possible outcomes, including both private bargaining and court-imposed remedies. Payoffs should be expressed in terms of profits.
5. When Abe graduated from the University of California at Berkeley, he bought a diamond ring with a golden bear insignia (Berkeley's symbol) to impress his high school friends. The person most impressed was his old sweetheart, Beth. They grew so fond of each other that Abe asked Beth to wear his ring. Then the quarreling began. The relationship deteriorated until, in a fit of anger, Beth enrolled as a student at Stanford (Berkeley's hated rival). Abe, naturally, broke off the relationship and asked for the return of his ring. Beth replied that it was a gift to her and she was not about to return it. He answered that he had only loaned it to her to wear for the duration of their friendship.
Abe and Beth are now involved in a legal dispute over the ring. Beth possesses the ring and she declares that she intends to sell it. Abe threatens to sue her. If Abe wins at trial, the court will require Beth to return the ring to him. The ring is worth $1,000 to Abe. If Beth wins at trial, the court will allow her to keep the ring. She would then sell the ring for $400 to an acquaintance. (The acquaintance does not know Abe and will not resell the ring to him.) In the event of a trial, each one expects to win with probability 0.5. A trial will cost Abe $100 and it will also cost Beth $100.
Abe and Beth start negotiating to reach a settlement and avoid a trial. There are no costs to settling out of court. Supply numerical answers to the following questions concerning the bargaining situation:
(a) What are the threat values?
(b) What is the total value of cooperation?
(c) What is the surplus from cooperation?
(d) What is a "reasonable" solution?