Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Consider that an investor invests $1,000 to an entrepreneur who has a project, and the payoff is given as the project return minus her/his


 Consider that an investor invests $1,000 to an entrepreneur who has a project, and the payoff is given as the project return

Consider that an investor invests $1,000 to an entrepreneur who has a project, and the payoff is given as the project return minus her/his effort level minus the repayment to investor. S/he decides either zero effort or an integer effort level between 1200 and 4000. If the project achieves success, it yields $10,000. Otherwise the return is zero. The entrepreneur has to pay back $ 2000 to the investor only when the project succeeds. Let the probability that the project succeeds by making efforts be p(e) = e/4000 between 1200 and 4000, and 30% %3D for zero effort, then answer the following questions: (a) Let the effort level for the entrepreneur be e. Then, how much is the entrepreneur's expected (net) profit? (b) How much is the entrepreneur's expected (net) profit when the entrepreneur chooses zero effort. (c) Answer the entrepreneur's incentive compatibility condition based on the above two questions.?

Step by Step Solution

3.48 Rating (178 Votes )

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Document Format ( 2 attachments)

PDF file Icon
63615d4ab6cb6_234490.pdf

180 KBs PDF File

Word file Icon
63615d4ab6cb6_234490.docx

120 KBs Word File

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Microeconomics An Intuitive Approach with Calculus

Authors: Thomas Nechyba

1st edition

538453257, 978-0538453257

More Books

Students also viewed these Accounting questions

Question

Define primary key.

Answered: 1 week ago