QUESTION 17 You are interested in performing a comprehensive economic analysis of the market for the new Mortem 1S, a floating hoverboard.

QUESTION 17You are interested in performing a comprehensive economic analysis of the market for the new Mortem 1S, a floating hoverboard.  Unfortunately, a faulty flange in the Mortem 1S sometimes causes the hoverboard to unexpectedly accelerate, which in turn causes accidents.  These accidents arise with a probability of 0.02, and the harm is always the same—the user suffers harm in the amount of $20,000.  Thankfully, technological advancements within the Mortem 1S’s onboard computer system ensure that it does not cause harm to third parties.  Rather, only the user is harmed when the Mortem 1S unexpectedly accelerates due to its defective flange.Suppose that the inverse market demand function for a riskless Mortem 1S is given by P = 10,000 – 10Q, and the hoverboard is produced in a competitive market with a constant marginal cost of production of $200, i.e., P = 200.  Assume that information is symmetric, i.e., both consumers and producers are able to accurately assess the probability of harm and resulting damages caused by the Mortem 1S.Suppose initially that due to its novelty, judges have not had the opportunity to rule that the manufacturer of the Mortem 1S is liable for the harms caused by its defective product.  That is, assume the liability rule is no liability.  What is the equilibrium price and quantity of Mortem 1S hoverboards under no liability?  P = , Q = Now suppose that the manufacturer of the Mortem 1S is strictly liable for all harms caused by the hoverboard.  That is, now assume the liability rule is strict liability.  What is the equilibrium price and quantity of Mortem 1S hoverboards under strict liability?  P = , Q = Suppose now that legislators, who are angered over the harms caused by the dangerous Mortem 1S, require that punitive damages of $100,000 must be awarded to victims (in addition to compensatory damages) whenever a court finds that the hoverboard causes harm to a user.  Continue to assume that the liability rule is strict liability.  What is the equilibrium price and quan