1
Study Questions on Breach of Contract—with Answers.
(taken from lecture notes on breach of contract)
1.
SAME FACTS AS IN THE ORIGINAL PROBLEM, BUT ASSUME
ABNORMAL COSTS ARE NOW $250 RATHER THAN $180.
Efficiency Analysis:
Is it efficient for the seller to perform when the unexpected
event occurs?
Value of performance = buyer’s + seller’s profits if perform:
Value to buyer (buyer’s profit):
$200 – 10 – K
Value to seller (seller’s profit):
K - $250
Total:
$200 – 10 – K + K – 250 = -$60
Value of breach = buyer’s + seller’s profits if breach:
Value to buyer:
– 10 – K
Value to seller:
K
Total:
-$10
Since -10 > -60, the best outcome is breach.
(1)
Expectation damages
= seller must pay damages equal to the buyer’s lost
profit if
breach occurs = $200
Seller’s profit if perform:
K - 250
Seller’s profit if breach:
K – damages = K – 200
So seller breaches.
Outcome is efficient.
(2)
Reliance damages
= damages equal the buyer’s reliance expenditure (plus
return of the contract price if paid in advance) =
K + $10 in this case
Seller’s profit if perform:
K - 250
Seller’s profit if breach:
K – (K + 10)
= -$10
So seller breaches if K < 240.
Since K can only be between $150 and $190,
seller breaches.
Outcome is efficient.
(3)
Restitution damages
= no damages (just return the advance payment of K)
Seller’s profit if perform:
K - 250
Seller’s profit if breach:
K – K = 0
So seller breaches if K < $250.
Once again, we get breach.

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