FE486A – Law and Economics Exam 3
Professor Schmitt
Spring 2014
Last 4 #’s of both Alphas _________________________________________________________
You have bargained with a moving company, FastDelivery Inc. to move your furniture to your
new house to start flight school in Pensacola, Florida by July 1st. In anticipation of your move,
you have agreed to pay $1000 to FastDelivery Inc. to move your furniture and you paid in full in
advance. It costs FastDelivery $500 to hire and move you (or anyone else) to Florida. You value
the move at $2000. Since you have a contract for moving, you have purchased a non-refundable
plane ticket to Florida for $150.
If FastDelivery Inc. breaches the contract, you have to find another moving company, which last
minute would cost you $1500. In addition, you would need to arrive later than previously
scheduled in Florida, which includes you purchasing another plane ticket, last minute for $500.
After contracting with you, FastDelivery Inc. has a contract proposal to move another
midshipman to Pensacola to also arrive by July 1st. This second midshipman is willing to pay
$2000 for services.
a) Is breaching the contract efficient? Explain.
Breaching is efficient (so is performing): both yield profits total surplus of $1350:
Perform
Your Profit: 2000 – 150 – 1000 = 850
FD Profit: 1000 – 500 = 500
Total surplus performing: 1350
Breach
Your profit: 2000 – 1500 – 1000 – 150 – 500 + D = - 1150 +D
FD Profits: 2000 + 1000 – 500 – D = 2500 – D
Total surplus breach = 1350
b) With restitution damages will the efficient outcome be reached? Explain and State $
amount of Damages.
D = 1000
So FD will breach (Profit with breach remedy is 1500 > 500 profit with perform)
c) With reliance damages will the efficient outcome be reached? Explain and State $
amount of Damages.
D = 1150
So FD will breach (Profit with breach remedy is 1350 > 500 profit with perform)
d) With expectation damages will the efficient outcome be reached? Explain and State $
amount of Damages.
D = 2000 (need to make you indifferent between perform profits of 850 = -1150 + D and breach
with remedy), so D = 2000
So FD will do either breach or perform because profits are the same.
You (promisee) have bargained with a garage owner (promisor) to fix your blown car engine
before the end of the month for $2,000 paid upon performance. In anticipation of performance,
you plan to drive to Pensacola at the beginning of next month.
Your cost of a hotel is $250 per day, D, (constant marginal cost MC = $250, total cost =
$250*D). The hotel requires you to pay the full amount in advance as a nonrefundable deposit.
Your marginal benefit (MB) per day (D) at the hotel (if actually there), measured in dollars, is
decreasing in the number of days being MB = $750 - $50*D.
If the garage owner’s mechanic quits, she cannot fulfill the obligation of having your car fixed on
time which has a probability of 1/5 of breach, or probability of performance = 4/5. If the
mechanic quits, your car is not ready on time, you cannot drive to Florida, and you lose any hotel
deposit.
a) What is the actual level of reliance given the assumption of perfect expectation
damages to make you whole?
Expectation damages leave you with what you would have had if there was no breach.
750 – 50D = 250  D = 10
b) What is the optimal level of reliance, i.e. efficient level of days contracted with the
hotel?
4/5 (750 – 50D) = 250
D = 8 3/4
Rent-a-car is a car rental agency. You and a friend have decided to enter into a contract in which
you will rent a car from Monday until Friday. You agree to rent a 2007 Subaru Imprezza for 5
days for $500. Your willingness to pay for this car for the week is $800. You also purchased a
new GPS for your trip from Hall-Mart for $200. Rent-a-car’s cost of cleaning, fueling, and
preparing the car for you is $80; $30 of which is spent Monday morning to deliver the car to your
residence.
Assume that you pay for the car when you enter into the contract. Just before the delivery on
Monday, Rent-a-car receives a call from another customer offering $750 for the same car that
week. If the contract is breached, you must call another car rental agency and the best price you
can find that Monday is $775.
a) Show a game tree illustrating the contract/no contract and breach/no breach – including
payoffs.
Perform
Profit you: 800 – 200 – 500 = 100
Profit RC: 500 – 80 = 420
Total surplus perform = 520
Breach with remedy
Profit you: 800 – 500 – 775 – 200 + D = - 675 + D
Profit RC: 500 + 750 – 80 – D = 1170 – D
Total surplus breach: 495
b)
Is breach efficient? Explain.
No total surplus higher with perform
c) With restitution damages, what are the damages, and will the efficient outcome be
reached?
D = 500
670 > 420 so breach (inefficient)
d) With reliance damages, what are the damages, and will the efficient outcome be
reached?
D = 700
470 > 420 so breach (inefficient)
e) With expectation damages, what are the damages, and will the efficient outcome
be reached?
D = 775
700 < 420 so preform (efficient)