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Q10, Currently, Rudy has two projects to undertake: P; & P2. Rudy must borrow $10 for one period. RK is not greedy and will ask
Q10, Currently, Rudy has two projects to undertake: P; & P2. Rudy must borrow $10 for one period. RK is not greedy and will ask Rudy to pay 5% interest for one period. The project Pi is risky and both Rudy & RK know it. This project may bring $20 next period with 80% probability or it may be worth $6 with 20% probability. Project P2 is not risky. It will be worth exactly $14 after one period. Fill in the blanks in the following table. (20 pts.) Project Expected payoff to RK Expected payoff to Rudy Pi P2 Q10, Currently, Rudy has two projects to undertake: P; & P2. Rudy must borrow $10 for one period. RK is not greedy and will ask Rudy to pay 5% interest for one period. The project Pi is risky and both Rudy & RK know it. This project may bring $20 next period with 80% probability or it may be worth $6 with 20% probability. Project P2 is not risky. It will be worth exactly $14 after one period. Fill in the blanks in the following table. (20 pts.) Project Expected payoff to RK Expected payoff to Rudy Pi P2
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