ECONOMICS 1471
HOMEWORK #2

1. Blacks in the post-Civil War agricultural South were in great demand as farm-workers because manpower was very scarce. Assume that a black farmworker X was willing to accept a minimum of $300 per year while planter Y was willing to pay a maximum of $1200 (the value of his crops). During the off-season, X promises to work a whole year for Y in exchange for a wage of $600. But once harvest time arrives, the scarcity of farm labor causes planter Z to offer X a wage of $1500 because the value of his crops is $2500.

a. Assume that planter Y could take X to court for a breach of contract. Make up a numerical example showing how breach of contract can be efficient. Do damages and specific performance produce the same outcomes? Explain.

b. If planters collectively pressure the legislature to pass an anti-inducement law making it illegal to induce a breach of contract, explain the consequences of such a law.

c. Suppose X and Y agree to the insert a clause in their contract specifying that X will pay Y $2000 in damages if he does not complete his contract. Discuss the efficiency properties of this contract (see section on liquidated damages).

d. Assume that a drought occurs and planter Y's crops are worth only $400. Make up a numerical example showing how breach of contract can be efficient. Do damages and specific performance produce the same outcomes? Explain.

2. Consider the following questions in Chapter 7: Q.7.27 and 7.47. Do you see any parallel between the supplementary reading on George Michaels and these questions? What would you conclude about the ultimate effects of favoring Michaels in this case? Explain.

3. R has rented L's premises for five years under the condition that he use the property as a saloon; furthermore, the contract forbids him to sublet the premises during the term of the lease. After two years, the county in which R has been operating his saloon suddenly and unexpectedly makes the sale of alcoholic beverages illegal. R breaches his contract with L and L sues for specific performance. Under that remedy, might it not be the case that R will be inefficiently bound to pay R the remaining three years rental? And would it not be more efficient if L had a duty to mitigate his losses by re-letting the premises if the routine award were money damages with a duty to mitigate? (Note: This question wonders whether an award of specific performance would be inefficient because L would not have to find another renter and would be able to force R to pay all the remaining rent owed under the contract.)