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2) Redo 1) with all the same values (e.g., same investment opportunities) except assume that instead of rm types being equally probable, the probability of
2) Redo 1) with all the same values (e.g., same investment opportunities) except assume that instead of rm types being equally probable, the probability of a Good Firm is 1/3 (and that of a Lemon is 2/3). a) Will both Good Firms and Lemons issue stock and invest in the opportunity at t = 0? Report steps lalc as noted above. Show all of your work. b) What are the equilibrium payoffs to shareholders? (Look at the rst example in Myers and Majluf). c) Is there adverse selection? Give an intuitive explanation for why the outcome differs in (l) and (2)
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