109 Legal and Economic Concepts II Spring 2000

Dick Ippolito

Office: 319

Phone: (703) 993-8243

Email rippolit@gmu.edu

Office hours: Wednesday: 9AM-NOON, 1-2PM and 4-6 PM

Other days: by appointment

Tutorials: There are no scheduled tutorials for Concepts II. I will hold occasional Saturday help sessions as time permits.

Required text: Robert Pindyck and Daniel Rubinfeld, Microeconomics 4th edition

Calculator You will find it useful to have a calculator with at least the following function: yx . The function ex is also useful. These are helpful for calculating present values.

Note taking: textbooks will not support about half of the material presented. I strongly recommend that you take careful notes, and that you redo your notes carefully following each lecture. You should maintain your final set of notes in a place where you cannot lose them.

Grades: The grade is determined by performance on a 4-hour final exam. I will distribute two or three practice take-home exams during the semester with answer sheets.

Overview:

The second semester of concepts will familiarize students with quantitative methods used in various legal applications. The course will review game theory issues, decision making under uncertainty, the basic principles of finance, and the elements of statistics. Applications will be emphasized, and hands-on calculations will be required in the course and for the final exam.

The following is a listing of lecture numbers and subjects. The reading assignments refer to Pindyck -– additional handouts might be distributed as appropriate. Please note: the schedule of subjects is tentative. I will either slow or advance the pace depending on the rate at which the average student assimilates the material.

1&2 Game theory: what is it and how is it used? Cournot solution, Nash equilibrium solutions; the relevance of rational behavior, and so on. Revisit portions of chapter 12, and study all of chapter 13.

3&4 Finance: How to compare numbers over time; inflation indexing, nominal and real interest rates; the present value of a stream of numbers; applications to valuing a bond, making decisions about alternative investment flows; calculating the present value of a pension annuity in an employment package. All of chapter 15.

5. Finance continued: How to value a stock. The Capital Asset Pricing Model (CAPM). What is it and why is it important? How does it affect discount rates? The role of diversification in a portfolio and just what risk do you get compensated for anyway? pp. 164-171.

6. Applications. A tort case involving lost wages; a simple divorce or estate problem with several assets to value.

7. Making decisions under uncertainty. Expected values, risk aversion, insurance, diversification principles. Chapter 5.

8. Introduction to statistics. Characteristics of a distribution of numbers. How to summarize results from a database; what is a mean, median, mode and quartile of a distribution? How do we measure the ‘spread’ of a distribution? What kinds of distributions do we normally see?

9. Getting to know the ‘normal’ distribution. How can we use the principles of the normal distribution to make inferences? How to read a normal probability table.

10. The basic idea of randomness. The elementary rules about probability. Becoming familiar with the binomial distribution. Learning to read a binomial table; and how to recognize a binomial problem.

11. What is a least squares regression? What about causality? What about bias if there are missing variables, or if the specification is incorrect? How do we tell if the estimated coefficients are ‘statistically significant?’ How do we know if the regression ‘fits’ the data pretty well?

12. Applications. Evaluating the results of the CONCEPTS I course survey. How to use information from a survey to make inferences. What results are ‘statistically significant?’ What relations are causal? What factors seem to influence performance on the exam? What omitted factors are probably pretty important?

13. More applications. How to tell if a company is vulnerable to a discrimination suit. How to use bond and stock return data to evaluate the likely success of a portfolio strategy over a long period. Redoing the patent monopoly problem, only this time, taking into account the issues of uncertainty and discounting.

14. This session is left open to accommodate the possibility that we may fall behind in the schedule. If we are on time, I will use the time to review all the important features of the course.

15. EXAM May 2, 6-10PM