Maurice Tutor

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    Argosy University/ Phoniex University/
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Category > Management Posted 02 Feb 2018 My Price 5.00

Dixit and Pindyck

(This follows Bernanke, 1983a, and Dixit and Pindyck, 1994.) Consider a firm that is contemplating undertaking an investment with a cost of I. There are two periods. The investment will pay off π1 in period 1 and π2 in period 2π1 is certain, but π2 is uncertain. The firm maximizes expected profits and, for simplicity, the interest rate is zero.

 

(a) Suppose the firm’s only choices are to undertake the investment in period 1 or not to undertake it at all. Under what condition will the firm undertake the investment?

 

(b) Suppose the firm also has the possibility of undertaking the investment in period 2, after the value of π2 is known; in this case the investment pays off only π2. Is it possible for the condition in (a) to be satisfied but for the firm’s expected profits to be higher if it does not invest in period 1 than if it does invest?

 

(c) Define the cost of waiting as π1, and define the benefit of waiting as Prob (π2 1 )E[I −π2 I π2 < i="" ].="" explain="" why="" these="" represent="" the="" cost="" and="" the="" benefit="" of="" waiting.="" show="" that="" the="" difference="" in="" the="" firm’s="" expected="" profits="" between="" not="" investing="" in="" period="" 1="" and="" investing="" in="" period="" 1="" equals="" the="" benefit="" of="" waiting="" minus="" the="">

 

 

 


Answers

Maurice Tutor
(5)
Status NEW Posted 02 Feb 2018 09:02 PM My Price 5.00

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