questions2-ans

# questions2-ans - Study Questions on Breach of Contractwith...

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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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