Question

(15) Breach of Contract

This question runs through the various concepts associated with breach of contract. Jack and Jill sign a contract whereby Jill must supply Jack with his fall line of clothing, which will be displayed in a fashion show whose date has already been set. Jack and Jill are both risk neutral and therefore base their decisions on their expected returns.

state	probability	Jack	Jill
good	0.9	20,000	10,000
bad (no breach)	0.1	20,000	- 30,000

e) (3)   Now modify the example slightly. Suppose that Jill had the option of training a back-up seamstress. If she had, this would have raised her costs by $6000 in the good state, but saved her $20,000 in the bad state if she does not breach. The original table is altered as follows:

state	probability	Jack	Jill
good (with seamstress)	0.9	20,000	4,000
bad (with seamstress and no breach)	0.1	20,000	- 10,000

If Jill had hired the back-up seamstress, would breach of contract have been socially desirable in the bad state? Would it have been socially desirable for Jill to hire the back-up seamstress? Under reliance damages, would Jill have hired the back-up seamstress?

Answer 1

e- Breach of contrcat will not be socially desirable in bad state. The pay off have win-win situation for both Jill and Jack. Hiring of backup seamstress have provided more value to Jill by saving cost in bad state but in good state the rising in cost is not much. It is desirable for Jill to hire because more value will be added by hiring . Yes, Jill have hired under reliance damage.