SophiaPretty

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    Strayer,Devery,Harvard University
    Mar-1995 - Mar-2002

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    WalMart
    Mar-2001 - Feb-2009

Category > Business & Finance Posted 07 Sep 2017 My Price 10.00

Sunghun is an entrepreneur who is considering

Sunghun is an entrepreneur who is considering between two investment projects.  Both projects are risky and both require an investment of $100.  Project 1 is opening an Economics Consulting Firm.  Since Sunghun is an excellent economist, this project is pretty safe:  with 80% probability Sunghun will be a successful consultant and earn $250 of revenues, and with 20% probability Sunghun will fail and earn only $100 of revenues.  Project 2 is opening a “Klassic Korean Kimchee” Food Truck.    Although Sunghun is a master chef, this project is much riskier.  With 20% probability the Food Truck is successful and generates $600 of revenues.  With 80% probability the Food Truck fails and generates only $60 of revenues. 

 

Cristina is a banker who may offer Sunghun a loan.  Cristina’s opportunity cost of money is 30%.  In other words, she would earn a 30% interest rate if she invested the money in a bank instead of lending it to Sunghun.[1]  In questions 1 - 4, we will explore the equilibrium contract that Cristina will offer under different assumptions about liability, competition and asymmetric information.

 

 

  • Standard Debt Contract and Symmetric Information.  In this problem Cristina offers Standard Debt Contracts, also known as unlimited liability credit contracts.  Under this type of contract, Sunghun always has to repay the loan (full principal plus interest) whether his project succeeds or fails.  We also assume symmetric information.  This means that in the credit contract, Cristina can specify and enforce the project that Sunghun must do.  A credit contract thus specifies two terms: the Project and the interest rate.  Let <Project, Interest Rate> denote the contract. For example, the contract <Project 1, 0.1> means that Sunghun must do Project 1 and the interest rate is 10%.

 

pls see the attach file

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SophiaPretty
(5)
Status NEW Posted 07 Sep 2017 08:09 AM My Price 10.00

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