7.10. SALE OF BUSINESS. Suppose that a firm owns a business unit that it wants to sell. Potential buyers know that the seller values the unit at either $100 million, $110 million, $120 million,... $190 million, each value equally likely. The seller knows the precise value, but the buyer only knows the distribution. The buyer expects to gain from synergies with its existing businesses, so that its value is equal to seller's value plus $10 million (In other words, there are gains from trade.) Finally, the buyer must make a take-it-or-leave-it offer at some price p. How much should the buyer offer?

7.10. SALE OF BUSINESS. Suppose that a firm owns a business unit that it wants to sell. Potential buyers know that the seller values the unit at either $100 million, $110 million, $120 million,... $190 million, each value equally likely. The seller knows the precise value, but the buyer only knows the distribution. The buyer expects to gain from synergies with its existing businesses, so that its value is equal to seller's value plus $10 million (In other words, there are gains from trade.) Finally, the buyer must make a take-it-or-leave-it offer at some price p. How much should the buyer offer?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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A10.
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