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Chapter Twelve:
Law and Markets
True/False Questions:
1) Government is the cornerstone of a free enterprise system.
2) A good factor concerning a market is that there are no uncertainties or risks
because everyone knows the rules and follows them.
3) Statutes enacted by legislatures and through decisions made by judges establish
laws.
4) The law is not the principal means of reducing uncertainty and improving reliance
in exchanges.
5) Common law originated in the 13 colonies as a way of resolving disputes and
setting law that was much more flexible than the statutory approach.
6) On the European continent, in South America, and elsewhere, civil law is used
rather than common law.
7) Commercial law is a product of the 20th century.
8) Property is a set of rights to control a tangible or intangible thing.
9) Property allows persons to reach mutually beneficial agreements.
10) The economic efficiency rationale for property has two aspects: property rules to
facilitate bargaining and property rules to provide incentives to create assets.
11) Incentives can be very clear such as in the case of a house and intellectual
property.
12) All means of establishing appropriability are private.
13) Firms may keep their intellectual property assets proprietary such as Microsoft
and its Windows XP code or Coca Cola and the formula for Coke.
14) The basic tradeoff in the protection of intellectual property is between the benefits
to society from the use of the idea or invention and the incentives for their
creation.
15) In the appropriability of rents, if the cost of replication is moderate and
intellectual property rights are tight, there is strong appropriability.
16) The issue with Napster is that the founders charged too much for their products.
17) There are only two types of protections for intellectual assets: patents and
licensing copyright.
18) Licensing makes the invention available to others and thus increases the benefits
to society from the invention.
19) A copyright can be claimed even without a filing with the government..
20) A trademark provides social and private value.
21) A franchise is almost anything that is unique and of value or potential value to a
company.
22) In a contract both parties seek assurances.
23) Contracts are also entered into to induce reliance.
24) Contracts must be written rather than oral.
25) The courts have three remedies when dealing with breach of contract situations:
damages, specific performance and utilitarian.
26) Court awards of damages take place ex post, and anticipation of those awards
provides ex ante incentives to fulfill promise while leading the flexibility to reach
contract when it is efficient to do so.
27) Liquidated damages are unlimited in terms of compensation and other related
damages for harm and are intended as penalties for particular actions such as
fraud.
28) Torts are civil wrongs—wrongs done by one person to another.
29) The law of torts, especially in the arena of product liability, is the principal and
most comprehensive source of intuitional guidance.
30) Social efficiency requires balancing the costs of injuries and the cost of care.
4
Multiple Choice Questions:
31) The cornerstone of the free market system is what?
a) The government
b) Business
c) Markets
d) Competition
32) What is another name for common law?
a) Judge-made
b) Jury-made
c) Public-made
d) Citizen-made
33) In which of the following countries is common law not used?
a) United States
b) France
c) United Kingdom
d) Canada, except Quebec
34) In the United States, the common law prevails in all but which of the following?
a) Property
b) Contract
c) Criminal
d) Torts
35) ________ is a set of rights to control a tangible or intangible thing.
a) Property
b) Common law
c) Civil law
d) Contract
36) In the appropriability of rents, if the cost of replication is high, and
intellectual property rights are _______, you have weak appropriability.
a) Tight
b) Loose
c) Flexible
d) Redoubled
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37) In terms of appropriability of rents, if the cost of replication is low and the
intellectual property rights are tight, there is ___________ appropriability.
a) Weak
b) Moderate
c) Strong
d) Flexible
38) Changing ____________ can dramatically alter the costs of replication of
intellectual creations, as in the case of Napster.
a) People
b) Tastes
c) Technology
d) Management
39) What is defined in the following? “A ______ may be granted for an
invention of ‘any new and useful process, machine, manufacture, or
composition of matter, or any news and useful improvement thereof.’”
a) License
b) Patent
c) Contract
d) Copyright
40) What must you do to claim a copyright?
a) File with the government
b) You can claim it even if you do not file with the government
c) File with local government
d) File on your income tax
41) A trademark produces what two values?
a) Economic and political
b) Economic and social
c) Economic and public
d) Social and private
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42) Contracts are entered into to induce _______, which refers to a change in
behavior by a party.
a) Assurances
b) Reliance
c) Common law
d) Exchanges
43) Which two of the following are ex ante concepts?
a) Conditions and statutes
b) Reliance and inducements
c) Duress and unconsionability
d) Duress and contracts
44) Which industry highlighted in your text seems to struggle mightily with
contract problems around research findings?
a) Dairy
b) Automobile
c) Record
d) Biotechnology
45) What ex ante approach is based on the principle that more complete
contracts can be more efficient?
a) Liquidated damages
b) Duress damages
c) Consequential damages
d) Expectation damages
46) What are torts?
a) Civil rights
b) Civil wrongs
c) Civil damages
d) Private wrong through public statutes
47) All of the following are the basic elements of a tort except:
a) An injury
b) An action that causes harm
c) The breach of duty owed to the injured party
d) The breach of utilitarian ethics
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48) Which of the following requires the balancing of the costs of injuries and
the costs of care?
a) Political efficiency
b) Social efficiency
c) Economic efficiency
d) Technological efficiency
49) What is defined as ‘the ability of an individual to control a particular
resource or to take an action’?
a) Entitlement or right
b) Freedom of choice
c) Justice-as-fairness
d) Justice and freedom
50) What branch covers products liability?
a) Common law of justice
b) Common law of torts
c) Common law
d) Common law of statutes
8
Essays and Review Questions:
1) Discuss, analyze and critique the politics of products liability.
2) What is a tort and why is it an important part of the law?
3) What is common law? Where did it develop? Why is it an important
aspect of the legal system?
4) Discuss, analyze and critique the concept of property in all its forms. In
that analysis, include the following concepts: bargaining, incentives and
appropriability. Focus in on intellectual property and use the Napster
situation as an example in terms of licensing, patents, copyrights and
trademarks.
5) Discuss and analyze contracts using the concepts presented in your text.
Be specific and be sure to define your terms, including the what, when,
where, how, and why.
6) What are the issues in Genentech and the City of Hope? Do you think the
biotech industry will continue to have such issues and how would you
recommend the industry and the society manage them?
7) Apply the law of torts to the Product Safety Problem.
8) What are the relationships among the following concepts: entitlements,
liability, social efficiency, and regulation?
9) Discuss, analyze and critique the development of products liability law
using specific examples in your analysis.
10) You are to deliver a speech to new business owners on the law and
markets. Write a brief speech outlining the major issues as you see them.
Give specific examples and be sure to define your terms.
