Answer Happy

Question 2. Haircuts (18 points) I open a barber shop on State Street selling cheap haircuts to undergrads. My barbers work fast. They can give a good haircut in just 15 minutes, but going that fast, each time they give a haircut, there's a chance they cut the customer's ear with their scissors; slowing down would reduce this risk. Getting cut by a barber's scissors is painful, doing $500 worth of harm to the customer. The risk is as follows: Time spent per haircut 15 minutes 20 minutes 30 minutes Risk of a scissors accident 1 in 50 1 in 100 1 in 500 My barbers value their time at $30 per hour, which is also how much I pay them; so the cost (both the social cost and the cost to my business) of providing a 15 minute haircut is $7.50, the cost of a 20 minute haircut is $10, and the cost of a 30 minute haircut is $15. Assume the budget haircut market is perfectly competitive, and my customers can correctly judge the risk of getting cut. (a) What is the efficient amount of time for my barbers to spend on each haircut? Explain. (b) Suppose as the business owner, I'm liable, under a strict liability rule, for any accidents that my barbers cause. How fast would I instruct them to work, and why? How much would I charge per haircut? Would demand for haircuts be efficient, higher than efficient, or lower than efficient? (c) Now suppose instead that I am liable under a simple negligence rule, and the standard of care is determined by the Hand Rule. Would I be liable for damages if my barbers were giving 15 minute haircuts? If they were giving 20 minute haircuts? If they were giving 30 minute haircuts? Explain. (d) Under a simple negligence rule with the standard of care determined by the Hand Rule, how fast would I instruct by barbers to work, and why? How much would I charge per haircut? Would demand for haircuts be efficient, higher than efficient, or lower than efficient? (e) If my customers were unaware of the risk of getting cut and didn't consider it, would demand be higher than, lower than, or efficient under a strict liability rule? What about under simple negligence? Explain. (f) Suppose that due to hindsight bias, in the event of an accident, a jury would believe an accident had been significantly more likely to occur than it actually was. Would this cause a problem under a strict liability rule? Would this cause a problem under a negligence rule? Explain.