Spud Co. is a dealer in potatoes. Chip Co. makes potato chips. On Monday, Jan. 1st, Spud and Chip enter into a contract in which Spud agrees to deliver 100 bushels of potatoes to Chip on Friday, Jan. 5th; Chip paid Spud $2.00 per bushel on Monday, Jan. 1st.
Spud’s cost of growing and delivering potatoes = $100
Chip’s cost of converting potatoes into chips = $100, $27 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 Jan. 8th 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 1: Assume for this variation that Chip paid for the potatoes at the time the contract was signed. Just before delivering the potatoes to Chip at noon on Friday Jan. 5th, Spud receives a frantic phone call from Babette, the chef at Chez Babette. She has discovered that the potatoes she bought from someone else are rotten and she needs 100 bushels immediately to make her famous vichyssoise (a fancy name for cold potato soup) that weekend. She is willing to pay $5.00 per bushel as she cannot wait till Monday Jan. 8th to buy potatoes on the spot market.
a. Is breach socially efficient? Explain.
b. Under what measures of damages (expectation, reliance, restitution) will Spud made the socially efficient decision to perform or breach? Explain.