Question
18. Assume an entrepreneur would like to undertake a project that costs $10 million. The project will have a payoff of $13 million 95% of
18.
Assume an entrepreneur would like to undertake a project that costs $10 million. The project will have a payoff of $13 million 95% of the time. However, 5% of the time, the project will suffer a loss and will only pay off $5 million. In the event of a loss, the entrepreneur can pay $6 million to fix the loss and return the project's payoff to $13 million. Assume that the entrepreneur would like to invest $2 million of his own money into the project and will therefore like to borrow the remaining $8 million.
What is the maximum the entrepreneur would be willing to pay for full insurance?
Group of answer choices
$0.20 million
$0.44 million
$0.42 million
$0.40 million
19.
Through the design of compensation contracts, firms can provide incentives for managers that help to re-align managerial and shareholder interests. More specifically, ______ in executive compensation can offset the ______ of a managers utility function.
Group of answer choices
concavity, concavity
concavity, convexity
convexity, convexity
convexity, concavity
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