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Need help with question i on filling the excel table. Please provide formulars for calculating each columns E(y1), E(y2), E(1) and E(2). Thanks a lot!!
Need help with question i on filling the excel table.
Problem 1: Credit Market Equilibriunm Ed is an entrepreneur who is deciding between two investment projects. Both projects are risky and require an investment of S150. The following are the details on the two projects: Project 1 consists of founding an economic consulting firm "Excellence with Ed" which is relatively safe: with 75% probability it succeeds and generates S550 of revenues, and with 25% probability it fils and generates only S250 of revenues. Project 2 is to open "Be a slugger with Ed", a baseball clinic for children. Although Ed is an outstanding baseball player, this project is much riskier: with 25% probability, it succeeds and generates $1200 of revenues, and with 75% probability it fails and generates only $160 of revenues. Caitlin is a banker who may offer Ed a loan. Caitlin's opportunity cost of money is 10%. In other words, she would earn a 10% interest rate if she invested the money in a bank instead of lending it to Ed. First, consider that Caitlin offers unlimited liability contracts, i.e. Ed must repay the loan (full principal and interest) whether his project fails or succceds. Caitlin can specify which project Ed must select and enforce this selection. A credit contract thus specifies two terms: the Project and the interest rate. Let Please provide formulars for calculating each columns E(y1), E(y2), E(1) and E(2).
Thanks a lot!!
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