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1. You have a job pays $x. You have been dreaming about opening up your own restaurant, but you know that restaurants in your town
1. You have a job pays $x. You have been dreaming about opening up your own restaurant, but you know that restaurants in your town fail within the first year with 40% probability. You have studied the market and figure the average successful restaurant yields a net profit of $y > $x, but you are weary since you would earn $0 if the restaurant fails. a. What is your expected utility from opening the restaurant (for a general utility fn U(c)? What is your expected utility from opening the restaurant if U(c) = c/4? b. What if in the case your restaurant failed, instead of limited liability resulting in income of $0, you suffered a loss of -$z, which meant you would have to sell assets to pay the debt? What effect do you think the limited liability option has on the borrowing rate for the en- trepreneur? In what ways does the limited liability option encourage entrepreneurship and in what ways does it discourage it? = c. Suppose we are in the limited liability case so that income is zero if the business fails. If the wage from your job is $x 50, what does $y have to be for you to be indifferent between keeping your job and starting the restaurant
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