There are two types of projects in the market: A (safer) and B (riskier). At time 1, the payoff of A will be either $500 (probability 0.75) or $300 (probability 0.25). The appropriate discount rate for project A is 12%. The minimum price A can accept is $350. The payoff of B will be either $800 (probability 0.2) or $100 (probability 0.8). The appropriate discount rate for project B is 20%. In this simple economy, there are 90% chance that the project will be A. Evaluate the funding situation, i.e., which type of project will be funded and the price, based on the following scenarios: If an honest information service firm exists in the market that can separate A from B and provide credible certification. What is the maximum price that the agent can charge for the service? If a bank exists and can provide partial financing and tell the difference between A & B but cannot verify the outcomes, what will be the maximum face values of loans to each project?

There are two types of projects in the market: A (safer) and B (riskier). At time 1, the payoff of A will be either $500 (probability 0.75) or $300 (probability 0.25). The appropriate discount rate for project A is 12%. The minimum price A can accept is $350. The payoff of B will be either $800 (probability 0.2) or $100 (probability 0.8). The appropriate discount rate for project B is 20%. In this simple economy, there are 90% chance that the project will be A. Evaluate the funding situation, i.e., which type of project will be funded and the price, based on the following scenarios: If an honest information service firm exists in the market that can separate A from B and provide credible certification. What is the maximum price that the agent can charge for the service? If a bank exists and can provide partial financing and tell the difference between A & B but cannot verify the outcomes, what will be the maximum face values of loans to each project?

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter17: Making Decisions With Uncertainty

Section: Chapter Questions

Problem 2MC

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There are two types of projects in the market: A (safer) and B (riskier). At time 1, the payoff of A will be either $500 (probability 0.75) or $300 (probability 0.25). The appropriate discount rate for project A is 12%. The minimum price A can accept is $350. The payoff of B will be either $800 (probability 0.2) or $100 (probability 0.8). The appropriate discount rate for project B is 20%. In this simple economy, there are 90% chance that the project will be A. Evaluate the funding situation, i.e., which type of project will be funded and the price, based on the following scenarios: When there is no information asymmetry and everyone knows everything. When there is information asymmetry and investors cannot tell if the project is A or B.
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VD A national sports network offers a community a chance to join a pro team The winner of the tryouts takes home the prize but the others (losers) gain nothing. There are 10 persons in the village that could tryout. Each person will decide to join the game if the expected value of the game is higher than $40,000. This type of problem is often called “the winner takes all.” Hint: complete the table first. Expected value of tryout = (Prize of the tryout) / (number of persons trying out) = expected prize Income to the community = prize money + income of all persons who did not try out Number of contestants prize if tryout is held Income to a person if they stay at home Expected prize for a person Income of persons who did not tryout Total Income to the community 0 $0.00 $40,000 $0 $400,000 $400,000 1 $180,000.00 $40,000 $180,000 $360,000 $540,000 2 $190,000.00 $40,000 3 $205,000.00 $40,000 4…
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