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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.

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.

Managerial Economics: A Problem Solving Approach
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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