A painter (Pablo) is contracted to paint a portrait of the buyer (Ernest). The price p = 27 is exchanged at the signing of the contract (before effort decisions are made or costs are realized.) The value to Pablo of the finished painting is VS = 0 and the value to the Ernest is V(r) = 25 + 11 - 73. Pablo can exert effort at cost s in preparation for the painting (practicing, reviewing photos of Ernest, spending time to find the best price on materials, etc.) that would increase the probability that the cost of the painting is low. The probability that c = q is given by q(s) = Pr(c = c) = $, $ 6 (0, v2], where cr = 25 and on = 60. The high cost exceeds Ernest's highest possible valuation, which means Pablo will breach the contract if the cost is ca- Hint: We are maximizing expected payoffs here. The expected outcome of a variable is given by E(X) = 1 pint where p is the probability of an event and a, is the payoff of that event. a) [4] Set up (but do not solve) the social planner's problem. Explain why we use the social planner's problem to find the efficient solutions. b) [6] Set up and solve both Pablo's and Ernest's problems under expectation damages for breach of contract. Assume V(r) and q(s) are observable to all parties. Hint: Solve the buyer's (Ernest's) problem first, and use that to solve Pablo's problem. c) [6] Set up and solve both Pablo's and Ernest's problems under restitution damages for breach of contract. Hint: Solve Pablo's problem first, and use that to solve Ernest's problem d) [4] Explain why neither of the remedies analyzed above give the efficient outcomes of "* = 0.21 and s* = 0.43, found from solving the social planner's