Peter wishes to buy a water cooler from Dolly. Peter values the water cooler at $500 and has negotiated a price of $400. Dolly is getting the water cooler from a distributor who will charge either $200 or $600. The higher cost reflects the shipping delays associated with COVID-19 and the potential need to import the water cooler using airfreight. Dolly expects to get the water cooler at $200 with a probability of p, and at a price of $600 with probability (1-p).

(i) What will perfect expectations damages be in this case and will this give Dolly an efficient incentive to perform the contract?

(ii) What would be reliance damages in this case and do they give Dolly an efficient incentive to breach the contract?

(iii) Assume that Peter actually has a second option, namely purchasing a water cooler from Anthony at a price of $550. If Dolly has to pay opportunity cost damages if she breaches, from who will Peter buy?

(iv) If Dolly has to pay reliance damages if she breaches, from who should Peter buy?