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Suppose
that Governor Schwarzenegger (GAS) pays Besanko, Dranrove, Shanley, and
Schaffer (BDS) an advance of $5 million to write the script in Incomplete
Contract, a movie version of their immensely popular text on business strategy.
The movie contract includes certain script requirements, including that GAS
gets to play a strong, silent business strategist with superhuman analytic
powers. BDS spend $100,000 worth of their time to write the script that is
tailor made for the ex-Terminator (GAS). When the turn in the script, GAS
claims that it fails to live up to the contractual requirement that he have
several passionate love scenes, and he attempts to renegotiate. Given the
ambiguity over what constitutes passion, BDS are forced to agree.
a)
What was BDS’ rent?
b)
What is their quasi-rent? What
assumptions do you have to make to compute this?
c)
Could BDS have held up GAS?
Explain.
