Contract_Problem - Contracts Practice Problem Spring 2007...

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Contracts – Practice Problem – Spring 2007 Molly Mall owns a large parcel of land, on which she is currently earning rents equal to $1 million from farmers leasing the land. She is considering changing the use of this land, entering a business deal with Cal Contractor. She offers to sell part of the land to Cal for $10 million dollars below its current market value in exchange for his promise to develop it, building homes and townhouses for upper middle class buyers. She plans to build an upscale mall on the remaining portion of land and profit from its proximity to residents of these homes. She expects to earn $2 million dollars from this venture. Cal expects to earn $2 million dollars from the deal as well. With the resources he would use to fulfill his promise he could earn $0.5 million dollars in an alternative project. Both Mollie and Cal are risk neutral. 1. What must hold true for this deal to get done without a contract? 2.
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This note was uploaded on 03/18/2011 for the course ECON 415 taught by Professor Holland during the Spring '09 term at Purdue University-West Lafayette.

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