2. Risk Averse Entrepreneur. You have programmed a new messaging app, whose value q + X...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
2. Risk Averse Entrepreneur. You have programmed a new messaging app, whose value q + X depends on its quality q and its market potential X. Expected market potential is X = 100 but there is uncertainty, with variance Var (X) = V = 40. Since you are risk averse, with parameter r= 1, you would like to sell the app to a (risk neutral) tech giant. The quality q equals 0 or 100, but only you know the realization of q while the tech giant thinks both of these values of q equally likely. The price p is exogenous. The tech giant and you simultaneously choose whether or not to agree to the trade; trade happens if both agree. (a) What are the values (i.e. certainty equivalents) of the messaging app to you and the tech giant as a function of q? (b) At which prices p would you be willing to sell the app if quality is high/low? (c) At which prices p does the tech giant face adverse selection, i.e. you sell only if quality is low? (d) For which prices p is the tech giant willing to purchase the app?² (e) For which prices p does a high/low quality get traded? 2. Risk Averse Entrepreneur. You have programmed a new messaging app, whose value q + X depends on its quality q and its market potential X. Expected market potential is X = 100 but there is uncertainty, with variance Var (X) = V = 40. Since you are risk averse, with parameter r= 1, you would like to sell the app to a (risk neutral) tech giant. The quality q equals 0 or 100, but only you know the realization of q while the tech giant thinks both of these values of q equally likely. The price p is exogenous. The tech giant and you simultaneously choose whether or not to agree to the trade; trade happens if both agree. (a) What are the values (i.e. certainty equivalents) of the messaging app to you and the tech giant as a function of q? (b) At which prices p would you be willing to sell the app if quality is high/low? (c) At which prices p does the tech giant face adverse selection, i.e. you sell only if quality is low? (d) For which prices p is the tech giant willing to purchase the app?² (e) For which prices p does a high/low quality get traded?
Expert Answer:
Answer rating: 100% (QA)
The value of the messaging app to the entrepreneur is CEq q X The value of the messaging app to the ... View the full answer
Related Book For
Federal Taxation 2015 Corporations Partnerships Estates & Trusts
ISBN: 9780133822144
28th edition
Authors: Thomas R. Pope , Timothy J. Rupert, Kenneth E. Anderson
Posted Date:
Students also viewed these accounting questions
-
A risk averse individual faces uncertainty with two outcomes: good, bad. The individual has income $560 under good and $350 under bad outcome. The probability of good outcome is 4/7 (so the...
-
Consider the model of consumption under uncertainty from the chapter 2 notes. Let the per period utility function be quadratic: u(c) =c- a2 c2. The household discounts the future at rate p. Future...
-
The yield per acre of a certain crop depends on the amount of fertilizer used and the amount of rainfall during the growing season. The table in Figure 4.2(a) shows crop yields in bushels per acre...
-
A UK company has a trading loss of 50,000 for the year to 31 March 2021. During the year, the company receives overseas property income (net of 40% withholding tax) of 12,000. Show the corporation...
-
If events A and B are independent, will P(A|B) be greater than, less than, or equal to P(A)? Explain.
-
Prudhoe Bay Co. uses the perpetual inventory system and makes all credit sales on terms of \(2 / 10 \mathrm{n} / 30\). During March, Prudhoe Bay Co. completed these transactions: Requirements 1. Open...
-
The Federal Rules of Civil Procedure have specific requirements for how motions are to be drafted. View the following website: www.casd.uscourts.gov. At the home page, go to Attorney...
-
Paul Adams owns a health club in downtown Los Angeles. He charges his customers an annual fee of $500 and has an existing customer base of 600. Paul plans to raise the annual fee by 6 percent every...
-
1. Given the following system of linear equations: x-3x=-2 -3x+y+6=3 2x-2y+(a-4)=b-3 (a) Determine the conditions on a and b if (i) the system has no solutions (ii) the system has only one solution...
-
Affordable Electronics Inc. manufactures medium-quality, reasonably priced wireless speakers for home use. The company uses standards to control its costs. The labour standards that have been set for...
-
Find steady state current i of a RL circuit with L=2 H and R=892 which can be modeled by the following differential equation: 2di/dt+8i=v(t) where v(t) = 16 cos(10t -45) with phasor technique. Also...
-
We want to see the effect of wind speed on the heat transfer coefficient between a human body and air. Calculate the average heat transfer coefficient at three different air velocities: \(1...
-
Consider a firm with a fixed-size production facility as described by its existing cost curves. a. Explain what would happen to those cost curves if a mandatory health insurance program is imposed on...
-
Can government do anything to reduce the number of people in the following categories? If so, what? a. Frictionally unemployed b. Structurally unemployed c. Cyclically unemployed
-
If the long-run aggregate supply curve gives the level of potential real GDP, how can the short-run aggregate supply curve ever lie to the right of the long-run aggregate supply curve?
-
Explain the relationship between the shapes of the productivity curves and the shape of the cost curves. Specifically, compare the APP curve with the ATC curve and the MPP curve with the MC curve.
-
A tunnel is designed to pass under a mountain at great depth. It will intersect a joint plane with the same strike as the tunnel alignment. There is an induced shear in the rock. The calculated...
-
It is possible to investigate the thermo chemical properties of hydrocarbons with molecular modeling methods. (a) Use electronic structure software to predict cHo values for the alkanes methane...
-
Orlando Corporation, a calendar year taxpayer, has been an S corporation for several years. On July 9, 2014, Orlando authorizes a second class of nonvoting preferred stock that pays a 10% annual...
-
Refer to the facts of Problem C:12-36 and assume the current year is 2014. Emily's prior gifts are as follows: Year ........Amount of Taxable Gifts 1974 ......................... $ 500,000 1998...
-
Murray Corporation's stock is owned by about 1,000 shareholders, none of whom own more than 1% of the outstanding shares. Pursuant to a tender offer, Said purchased all the Murray stock for $7.5...
-
Fill in the Blank. In a random process, the outcome of an experiment will be a function of some _________ such as time.
-
What is the covariance between two random variables \(X\) and \(Y\) ?
-
The joint density function of two random variables \(X\) and \(Y\) is given by \[p_{X, Y}(x, y)= \begin{cases}\frac{x y}{9}, & 0 \leq x \leq 2,0 \leq y \leq 3 \\ 0, & \text { elsewhere }\end{cases}\]...
Study smarter with the SolutionInn App