Yvonne contracts with Xavier to build a new building for her restaurant business for occupancy on Sept. 1. Some events could jeopardize the completion of the building such as delay in delivering building supplies, workers falling behind or getting sick s.o. In reliance to the completion of the building, Yvonne could hire personnel, buy equipment, furniture, supplies, etc. The more reliance investment Yvonne undertakes, the costlier a breach by Xavier. Suppose that there are two levels of reliance: high and low. They are associated with a different payoff for Yvonne depending on whether the contractor completes the house on time or with a delay. If her reliance level is low, her payoff from on time completion is $20,000 while her payoff from a delay is -$10,000. If her reliance level is high, her payoff from on time completion is $25,000, while her payoff from a delay is -$40,000. Under regular investment in performance by Xavier, the likelihood of on time completion is 0.8. Xavier can increase the likelihood of on time completion to 0.9 by increasing his performance costs by $5,000.
1. The level of investment by Xavier and Yvonne that maximizes total surplus is ? (high/low) investment in reliance by Yvonne and ? (regular/high) investment in performance by Xavier.
2. The total surplus under these efficient investment levels by both parties is? .
3. If the court compensate Yvonne for a breach of contract using expectation damages, the amount of damages under low investment in reliance would be?
while the amount of damages under high investment in reliance would be?
4. Under expectation damages, Yvonne would find it optimal to undertake ? (high/low) investment in reliance.
As a result, Xavier would choose ? (regular/high) investment in performance.
5. Suppose that the parties anticipate that the court would award hypothetical expectation damages and that they will determine that the reasonable reliance level by Yvonne corresponds to the low investment in reliance. Then, the hypothetical expectation damages that the court will award Yvonne in a case of contract breach is ?. Given these anticipated damages, Xavier will find it optimal to undertake ? (regular/high) investment in performance.
6. Hypothetical expectation damages will result in? (high/low) investment in reliance by Yvonne.