2. In the game between the manager and the stockholders of Ross (1977), the future value of the firm is random and uniformly distributed on the interval [0, t], where t is the upper bound of V₁. The manager knows the value of t, but the stockholders do not, and this is the asymmetry of information. In observing the debt level F chosen by the manager, the stockholders think that the value of t is given by a[F]. In the lecture on the model of Ross, it was shown that a[F] has the following form: q[F] = √44 LF+c². Compute the debt level F that maximizes the manager's expected payoff.

2. In the game between the manager and the stockholders of Ross (1977), the future value of the firm is random and uniformly distributed on the interval [0, t], where t is the upper bound of V₁. The manager knows the value of t, but the stockholders do not, and this is the asymmetry of information. In observing the debt level F chosen by the manager, the stockholders think that the value of t is given by a[F]. In the lecture on the model of Ross, it was shown that a[F] has the following form: q[F] = √44 LF+c². Compute the debt level F that maximizes the manager's expected payoff.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

5
Angie owns an endive farm that will be worth $90,000 or $0 with equal probability. Her Bernouilli utility function is u(w) =√w, where w is her wealth level (sum of initial wealth and the worth of the endive farm). 1. Suppose her firm is the only asset she has, that is, she has no initial wealth. What is the lowest price P at which she will agree to sell her endive farm before she knows how much it will be worth? 2. Redo part (1) assuming that she has $160,000 in her bank safe. 3. Compare and discuss your results in parts (1) and (2). What relationship can you find between Angie’s initial wealth level (zero versus $160,000) and her risk aversion?
Find the Pratt - Arrow risk - aversion function for a utility function U(W) = log(0.5-W + 500), where W is the amount of wealth in €. Suppose that an investor's wealth is subject to outcomes -800 €, 500 €, 500 € and 1, 000 € which affect the initial amount of 2,500 € with probabilities of their occurrence 40%, 15%, 15% and 30%, respectively. a) Using the Taylor approximation to certainty equivalent, calculate an approximate expected utility value. b) Calculate the certain equivalent of the investor's uncertain wealth. Interpret.
6. From the following information determine the markon allowance if the markon percentage has been determined to be 36%. The store has purchased 100 dresses at $56 per dress. They are using an initial 50% markup to determine the initial retail price.
7
Q2
if u can answer the first question it would be helpful. Thank you.
1 Question 2. Suppose that there is one risk free asset with return rf and one risky asset with normally distributed returns, r ∼ N(µ, σ2). The investor has an expected utility maximizer with the CARA utility u(r) = −e −Ar. Write down the investor’s maximization problem of choosing α fraction of his wealth will be invested in the risky asset Find the optimal fraction of wealth that the investor will invest in the risky asset α∗Hint: Use the fact that if a random variable x is distributed normally with mean µx and variance σ2x , then for any constant α, What happens to the optimal fraction of wealth that the investor will invest in the risky asset as the risk aversion A increases? Explain the intuition behind your result.
F3
Suppose Tyler decides to use $10,000 currently held as savings to make a financial investment. One method of making a financial investment is the purchase of stock or bonds from a private company. Suppose Warm Breeze, a cloud computing firm, is selling bonds to raise money for a new lab. This practice is called finance. Buying a bond issued by Warm Breeze would give Tyler the firm. In the event that Warm Breeze runs into financial difficulty, will be paid first. Suppose instead Tyler chooses to buy 250 shares of Warm Breeze stock. Which of the following statements are correct? Check all that apply. Expectations of a recession that will reduce economywide corporate profits will likely cause the value of Tyler's shares to decline. The Dow Jones Industrial Average is an example of a stock exchange where he can purchase Warm Breeze stock. An increase in the perceived profitability of Warm Breeze will likely cause the value of Tyler's shares to rise. Alternatively, Tyler could undertake…
A1
Suppose you visit with a financial adviser, and you are considering investing some of your wealth in one of three investment portfolios stocks, bonds, or commodities. Your financial adviser provides you with the following table, which gives the probabilities of possible returns from each investment To maximize your expected return, you should choose: Stocks Bonds Probability Return Probability Return 0.15 20% 0.15 16.7% 06 10% T 04 7.5% 0.25 8% 0.45 3.3% OA bonds OB stocks OC. commodities OD. All of the portfolios have the same expected return. If you are risk-averse and had to choose between the stock or the bond investments, you would choose OA the stock portfolio because there is less uncertainty over the outcome OB. the bond portfolio because there is less uncertainty over the outcome. OC. the stock portfolio because of greater expected return. OD. the bond portfolio because of greater expected return. Commodities Probability Return 02 20% 0.2 15% 0.2 8% 02 02 5% 0%