Econ 522 ReviewDecember 12, 2011Econ 522 ReviewContract LawDamages (C & U 7.1) A buyer (B) pays $10,000 to a NewOrleans grain dealer (D) in exchange for D’s promise to delivergrain to B’s office in London on October 1st. As a result of signingthe contract, B decides not to sign a similar contract with anotherdealer for $10,500.B signs a shipping deal with shipper S , and pays a non-refundable$100 docking fee to the shipper. B signs a contract to sell thegrain to a third party for $11,000.En route the grain is damaged, and the dealer backs out of thecontract and sells the damaged grain to a cattle rancher for $500.B buys the equivalent grain form some other party for $12,000.Econ 522 ReviewContract Lawa. What would expectation damages be for D’s breach of contract?b. Reliance damages?c. Opportunity cost damages?Econ 522 ReviewTort LawAt a specific restaurant there is a 1% chance of food poisoningthat would cause $1,000 in damage to the victim. There are threepotential customers, who have values of $10, $15, and $20 for ameal at this restaurant. Suppose initially there is no liability rule ifsomeone gets sick, and the menu cost of the meal is $8.a. What is the efficient activity level (how many people should beeating at this restaurant)?b. How many people will choose to eat here if they are fully awareof the risk? If they are not aware of the risk?Econ 522 ReviewTort LawAt a specific restaurant there is a 1% chance of food poisoningthat would cause $1,000 in damage to the victim. There are threepotential customers, who have values of $10, $15, and $20 for ameal at this restaurant. Suppose the rule is strict liability, and themarket is competitive.a. How many people will choose to eat here if they are fully awareof the risk? If they are not aware of the risk?Econ 522 ReviewLegal ProcessSuppose a plaintiff expects to win $10,000 with probability 5% and$0 otherwise. The cost of a trial for the plaintiff is $2000, whilethe cost of a trial for the defendant is $6,000.a. What are the threat points, gains from cooperation, and payoffsif the two sides decide to settle and split the gains (assumingthe outside option is to go to trial)?b. Is the threat of a lawsuit from the plaintiff credible?Econ 522 ReviewProperty LawThe government is interested in acquiring land to build a school.The school will be a public good, creating $5,000,000 in totalvalue. The land the government wants to build on is currentlyprivately owned. First, suppose the land is made up of 30 smallplots, each one owned by a different owner. Each owner values hisown land at $100,000.a. Would transaction costs be high or low?b. If the fair market value is $90,000 per plot, would thegovernment’s use of eminent domain be efficient?Econ 522 ReviewProperty LawNow suppose the land is occupied by one owner, a real estatedeveloper, who values the land at $10 million.a. Would transaction costs be high or low?b. If the fair market value is $2.7 million, would the government’suse of eminent domain be efficient?Econ 522 ReviewProperty Lawc. Which type of rule, property or liability, is generally moreefficient when transaction costs are high, and which is generallymore efficient when transaction costs are low?Econ 522
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