For question 1-4, consider the following fact pattern. Bill enters into a contract with Sam. Sam promises to deliver a coffee mug to Bill, and Bill makes an upfront payment to Sam (of X dollars). Sams cost of production is $5, and Bills valuation of the widget is $10. Furthermore, Bill needs to invest $1 prior to delivery to enjoy the value (of $10) of the coffee mug. Finally, a second buyer, Bob, may value the mug at $0, $8, or $50, and make an offer equal to his valuation to Sam after he produces the coffee mug (and obviously before the delivery to Bill). The likelihood of Bob having each of the three valuations equal 1/3. Assume that if breach occurs, it occurs after Bill invests $1 to enjoy the value of the coffee mug. 1) Write down the potential expectation, restitution, and reliance damages that Sam would have to pay if he breaches the contract. 2) Under what circumstances is breach efficient? A. Always. B. Never. C. Only if Bobs valuation is $8 or $50. D. Only if Bobs valuation is $50. E. None of the above. 3) Under which damage measures we considered (i.e. expectation, reliance, and restitution, as defined by Polinsky) will breach occur only if it is efficient? A. Expectation B. Reliance C. Restitution D. All of the above E. None of the above 4) Which of the damage measures we considered fully insures Bill, i.e. removes all the risk away from him? A. Expectation B. Reliance C. Restitution D. All of the above E. None of the above For questions 5-7, suppose that a similar contractual arrangement takes place to that described above, with the exception that Bill can choose how much to invest in reliance. He can either invest $1 and obtain a value of $10 from the mug (as in the previous case), or he can invest $2 and obtain a value of $20 from the mug. Suppose further that the parties will end up agreeing on a contract price that exceeds $8.5. 5) What is the probability with which Sam will breach? A. 1 B. 1/2 C. 1/3 D. 1/4 E. None of the above 6) What is the optimal level of reliance? A. $1 B. $2 C. Both are equally efficient D. My dog is barking E. The weather is great 7) Which damage measures lead to optimal reliance? A. Only Reliance B. Only Restitution C. Only Expectation D. All three of these damage measures E. None of the above