Consider a contract between buyer B and seller S for delivery of a good that S must produce. Suppose that the value of performance to the buyer, V, nonsalvageable reliance by the buyer, R, and price, P (payable on delivery) are
V = $1,000
R = 100
P = 650
Suppose that, at the time the contract was made, the cost of production, C, was uncertain. However, when the time of production arrives, it takes one of three values:
C {$700, $900, $1,100}
After observing C, the seller must decide whether to produce and deliver the good, or not produce it and breach the contract.
(a) For which values of C (if any) is it efficient to breach the contract?
(b) For which values of C will the seller breach under expectation damages?
Under reliance damages? Under zero damages? How do your answers compare to (a)?