1.

For the first seven questions, consider the economy of Columbia. In this economy, there are three firms potentially interested in issuing a $100,000 bond to project each hopes will be profitable:

The Heckle Firm has a 70% chance of a $150,000 return.

The Ickle Firm has an 80% chance of a $140,000 return.

The Jackle Firm is credibly guaranteed to get a $100,000 return.

The only other possibility for all firms is failure, a $0 return. Assume that these firms will issue bonds as long as savers want them.

Calculate the expected value of the Ickle Firm's project.

2.

Continuing with the information about Columbia:

Now, we enter Stage One, where information is asymmetric, but bond buyers assume no firms have yet left the market as a result. Because information is asymmetric, bond buyers demand a return of 15% ($115,000 total) to buy the bond.

What is the required minimum potential return bond buyers will demand to buy bonds under these conditions, taking into account firm risk?

3.

Continuing with the information about Columbia:

Select the firm(s) that will issue bonds in Stage One, where conditions are as listed above. You must select all applicable firms (if there's more than one)

Group of answer choices

Heckle

Jackle

Ickle

No firms will issue bonds.

4.

Continuing with the information about Columbia:

As in our examples we'll assume that firms we said wouldn't issue in the previous question end up dropping out of the market. Nothing else changes in terms of bond buyer requirements.

Considering what firm/firms is/are left as Stage One ends and we begin the next stage, what percentage chance of success will buyers use when making calculations?

5.

Continuing with the information about Columbia:

Now we're in Stage Two, with the assumptions we stated in the last question.

What is the new required minimum potential return bond buyers will demand to buy bonds under these conditions, taking into account firm risk? Carefully follow all numeric instructions.

6.

Continuing with the information about Columbia:

Select the firm(s) that will issue bonds in Stage Two, where conditions are as listed above. You must select all applicable firms (if there's more than one)

Group of answer choices

Heckle

Jackle

Ickle

No firms will issue bonds.

7.

This is the last question about Columbia.

At the end of Stage Two, will market failure have occurred? Why or why not?

Group of answer choices

Yes, because no firms will issue bonds.

No, because no firms will issue bonds.

Yes, because at least one firm still issues a bond.

No, because at least one firm still issues a bond.