S wants to sell her home in the Beach area of Toronto for 3 million dollars. S values her house at 3 million dollars.

(a) (5 marks) B puts an offer in for 3 million dollars conditional on financing. B values the house at 4 million dollars. A bidding war starts. Before B and S sign a contract for a price of 3 million dollars, C offers to buy the house for 3.5 million dollars. C further assures S that his offer is unconditional in that his financing is pre-approved, B puts a counter-offer for 4 million dollars, but it is still conditional on financing.

Assuming zero (0) transaction costs, what contract should S accept in order to obtain the most socially optimal outcome? Be sure you fully explain why your answer is correct including any important assumptions you make about how S evaluates the offers.

(b) (5 marks) S accepts C's offer for 3.5 million dollars. Before completion of the contract, C loses his job and now values the house at 2 million. B resubmits her original offer at 3 million to S. Assuming zero (0) transaction costs, explain the bargaining outcome for surpluses among S, B and C if S sells to B and has a remedy to sue C for expectation damages?

(c) (5 marks) Assuming zero (0) transaction costs, explain the bargaining outcome for surpluses among S, B and C if S has a remedy to sue C for specific performance instead of expectation damages?

(d) (5 marks) Assuming transaction costs are high enough to prevent bargaining in parts (b) or (c), fully explain which remedy is more socially efficient?