Part II: Short-answer questions 1. Assume Collegiate Apparel, Inc. (CAI) has contracted with Basic Ts for the delivery of a shipment of plain t-shirts that will be used to the manufacture t-shirts featuring the ISU logo. The contract calls for Basi CAI at a price of S5 per unit. CAI can sell the IsU t-shirts to a number of different retailers for $15 per unit. CAI's production costs for 100 ISU t-shirts $6 per shirt+ the cost of the plain shirts. c Ts to deliver 100 plain shirts to a) In order to create the incentive for efficient breach, perfect expectation damages should be set at what level? Why will the level of damages you have specified ensure breach will occur only when it is efficient? (8 points) b) Assume that, relying on its contract with Basic Ts, which guarantees delivery of the plain t-shirts within 3 days delivery from any other supplier takes at least four days), CAI enters into a contract with the Alamo to sell the Alamo 100 ISU t-shirts for $20 each on the condition that the finished product is delivered within four days (it takes CAI one day to produce and deliver the ISU t-shirts once it has taken delivery of the plain shirts). In the event that CAI cannot meet its commitment to the Alamo in the time specified, the price per t-shirt will fall to $7. In addition, if Basic Ts does not deliver the plain shirts by the date specified in the contract, CAI will have to purchase the plain shirts from another company at twice the per unit price it has agreed to pay Basic Ts. The probability that Basic Ts will perform its contract with CAl is 0.6. Based on this information, is CAI's reliance on the contract with Basic Ts efficient? Provide evidence to support your answer. (8 points) Part II: Short-answer questions 1. Assume Collegiate Apparel, Inc. (CAI) has contracted with Basic Ts for the delivery of a shipment of plain t-shirts that will be used to the manufacture t-shirts featuring the ISU logo. The contract calls for Basi CAI at a price of S5 per unit. CAI can sell the IsU t-shirts to a number of different retailers for $15 per unit. CAI's production costs for 100 ISU t-shirts $6 per shirt+ the cost of the plain shirts. c Ts to deliver 100 plain shirts to a) In order to create the incentive for efficient breach, perfect expectation damages should be set at what level? Why will the level of damages you have specified ensure breach will occur only when it is efficient? (8 points) b) Assume that, relying on its contract with Basic Ts, which guarantees delivery of the plain t-shirts within 3 days delivery from any other supplier takes at least four days), CAI enters into a contract with the Alamo to sell the Alamo 100 ISU t-shirts for $20 each on the condition that the finished product is delivered within four days (it takes CAI one day to produce and deliver the ISU t-shirts once it has taken delivery of the plain shirts). In the event that CAI cannot meet its commitment to the Alamo in the time specified, the price per t-shirt will fall to $7. In addition, if Basic Ts does not deliver the plain shirts by the date specified in the contract, CAI will have to purchase the plain shirts from another company at twice the per unit price it has agreed to pay Basic Ts. The probability that Basic Ts will perform its contract with CAl is 0.6. Based on this information, is CAI's reliance on the contract with Basic Ts efficient? Provide evidence to support your answer. (8 points)
