Local sport shoes manufacturer, sport shoesCo manufactures sport shoes for a local school SunnyHope, who adds their branding and resells the sport shoes at the in school store.

The parties enter into a contract on Monday, whereby sport shoesCo agrees to deliver 200 sport shoes to SunnyHope on Friday, and SunnyHope agrees to pay $50 per sport shoes. The sport shoes cost sport shoesCo $25 per unit. SunnyHope can sell the sport shoes for $100 each.

SunnyHope then pays $1,000 to rebrand the sport shoes, $250 of which must be committed on Thursday to secure the screenprinter, and must be paid again if they do not screenprint the sport shoes on Friday. If the sport shoes don't arrive on Friday, SunnyHope must wait until Saturday to buy new sport shoes on the spot market, at a cost of $75 per sport shoes.

Assume that sport shoesCo collects payment at the time of delivery.

Now - sport shoesCo can pay $5 per unit in advance for shipping to SunnyHope, to reduce it's total cost to $20 per unit. Total cost will be $25 per unit if selling to others (plus the advance payment).

SunnyHope's store is under risk of getting shut down due to a sudden earthquake. Any sport shoes they receive will go to waste. SunnyHope can take certain precautions so they don't get shut down:

Level of Precaution	Prob. of Shut Down	Cost of Precaution
1	50%	$0
2	20%	$1,500
3	0%	$4,300

If SunnyHope breaches, sport shoesCo can sell the sport shoes to another school for $40 per sport shoes. Assume they find out they are shut down before having to incur the $250 screen printer cost.

1. What is the efficient level of precaution?

2. Under what measures of damages will SunnyHope engage in efficient precaution?