Answered: Consider the model of investment under…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Consider the model of investment under asymmetric information D=(1 + r)(1- W). Suppose that initially the entrepreneur is undertaking the project, and that (1 + r)(1- W) is strictly less than R^MAX. Describe how each of the following affects D:
(a) A small increase in W .
(b) A small increase in r.
(c) A small increase in c.
(d) Instead of being distributed uniformly on [0, 2γ], the output of the project is distributed uniformly on [γ - b, γ + b], and there is a small increase in b.
(e) Instead of being distributed uniformly on [0, 2γ], the output of the project is
distributed uniformly on [b, 2γ + b], and there is a small increase in b.

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