Reference no: EM133065381
Alice owns a house she values at 3.5 million dollars. Brad wants to buy the house and was willing to pay 4 million dollars for it. By email, Alice and Brad reach an agreement that Alice will sell Brad the house for 3.75 million dollars. Brad would have paid 4 million dollars for an alternative house if Alice had not agreed to this sale.
Christine contacts Alice and offers to pay 4 million dollars to Alice for the house because Christine values this house at 4.5 million dollars. Alice delays telling Brad she wants to cancel their contract, but when she does, Brad cannot get the alternativehouse he wanted for 4 million dollars and instead has to buy another house for 4.25 million.
(a) What surplus amount was generated by the original email contract? Why is this amount suboptimal?
(b) If Brad tells Alice he will be seeking expectation damages for breach of contract, how will expectation damages affect the allocation and redistribution of surplus among Alice, Brad and Christine, if transaction costs = 0. How high would transaction costs be, if Alice and Brad hired lawyers, to prevent bargaining?
(c) If Brad tells Alice he will be seeking reliance damages for breach of contract, how will reliance damages affect the allocation and redistribution of surplus among Alice, Brad and Christine, if transaction costs = 0. How high would transaction costs be, if Alice and Brad hired lawyers, to prevent bargaining?
(d) If Brad tells Alice he will be seeking opportunity cost damages for breach of contract, how will opportunity cost damages affect the allocation and redistribution of surplus among Alice, Brad and Christine, if transaction costs = 0. How high would transaction costs be, if Alice and Brad hired lawyers, to prevent bargaining?
(e) If there is no bargaining which remedy among expectation damages, reliance damages or opportunity cost damages is more efficient?
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