What remedy would produce an economically efficient outcome

Assignment Help Business Economics

Reference no: EM13982666

John is buying some wood from Michael at a price of $50. He needs to build warehouse to put them in. He has two options: (i) build a high quality warehouse at a cost of $100; or (ii) build a simple warehouse at a cost of $50. He will use the materials to build fancy wooden furniture which he will then sell. In the high quality warehouse the wood will definitely not be damaged and the furniture produced will be worth $500. In the simple warehouse some wood may be damaged and the expected sales will be only $300. John is concerned that Michael may not deliver the wood (with probability p) in which case John cannot produce any furniture.

a) If there is no rule that would hold Michael liable for any damages if he breaches the contract, which type of storage space should John build?

b) Suppose instead that Michael would be liable for perfect expectation damages if he fails to deliver the wood. What would these damages be and what type of storage space should John build? Is this efficient?

c) What remedy would produce an economically efficient outcome?

Reference no: EM13982666

Questions Cloud

A consumer group conducted a study regarding : What is the mean "weekly hours of TV watched" for the sample?a.) .38b.) 12c.) 15.42d.) 17e.) 370

Pay to learn this strategy and reduce her taxable income : Taxes paid for a given income level Juanita is getting ready to do her taxes. She is single and lives in Denver. Juanita earned $90,000 in 2011. She reviews the following table, which shows the IRS tax rates for a single taxpayer in 2011. The maximu..

Determine whether supply or demand or both will change : For parts a through d of this problem, determine whether supply or demand, or both, will change. Indicate whether the price and quantity will rise or fall in the indicated market as a result of each change presented. In the market for oranges, the ex..

Calculate the price elasticity of demand for oranges : When the price of oranges is $5 per lb, the quantity demanded is 100 lbs per week. When the price rises to $20 per lb, the quantity demanded falls to 99 lbs per week. Calculate the price elasticity of demand for oranges, and say whether it is elastic..

What remedy would produce an economically efficient outcome : John is buying some wood from Michael at a price of $50. He needs to build warehouse to put them in. He has two options: (i) build a high quality warehouse at a cost of $100; or (ii) build a simple warehouse at a cost of $50. If there is no rule that..

Consider the situation of an inverted yield curve : Consider the situation of an inverted yield curve. What does this mean? Why is it unusual? Under the theories of the term structure, why is an inverted yield curve considered bad news for the economy?

Required reserve ratio and the money multiplier : What is the relationship between the required reserve Ratio and the money multiplier? How are they related and when RR increases, then what happens to the money multiplier?

Insured drivers will not be as careful is due to the problem : The concern of an auto insurer that insured drivers will not be as careful is due to the problem of:

About to be arrested for embezzling money from the bank : A late-night news report says the president of a local bank is about to be arrested for embezzling money from the bank at which he works. This causes worried depositors to line up in front of the bank the next morning wanting to withdraw all of their..

User Account

All Pages