Spud Co. is a dealer in potatoes. Chip Co. makes potato chips. On

Monday, Spud and Chip enter into a contract in which Spud agrees to deliver

100 bushels of potatoes to Chip on Friday; Chip agrees to pay Spud $2.00 per

bushel.

Spuds cost of growing and delivering potatoes = $100

Chips cost of converting potatoes into chips = $100, $25 of which must

be spent on Friday morning before the potatoes are delivered and which cannot

be recovered if no potatoes arrive.

If no potatoes arrive on Friday, Chip must wait until Monday to call

around to alternative suppliers to purchase potatoes. The price of potatoes on

this "spot" market is $3.00 per bushel. The price of potato chips is $4.00 per

bushel.

Variation 2: Assume for this variation that Chip agreed to pay for the

potatoes C.O.D. On Thursday, Chip is shut down for health code violations and

will not be able to reopen for two months while it renovates its production

facilities to bring them up to code. It therefore has no use for the potatoes to be

delivered on Friday. If Chip performs by taking delivery of the potatoes, they

will go to waste. If Chip breaches, it will refuse to accept delivery. Spud, as

dealer, can sell the potatoes to someone else for $1.50 a bushel.Is breach efficient?

What is the profit for both Chip and Spud and What is the cost of damage for both Chip and Spud?