Question 3. You are the CEO of Labrador-net, an internet provider to remote towns in Newfoundland (Canada) that do not receive any other internet services. After the Covid-19 lockdowns, internet use has increased and your company is thinking of building an optic bre network in the town of Rocky Falls. Building that network will cost $200m and once the network is built this cost is sunk. There is a 50% chance that the internet services to Rocky Falls will be highly successful in which case your company makes revenues of $320m in present value terms. There is also a 50% chance that the internet services to Rocky Falls will be unsuccessful, in which case your company makes revenues of only S140m in present value terms. Your company could, of course, not spend any money and not build the network. (a) Draw up the decision tree representing the choice facing your company. Do you recommend to build the network or not? Why? [10 marks] You are informed that the regulator, Competition Bureau Canada, has passed a new rule. If you build a network then you must allow your rival internet provider, Beaver-Tel, to use the network. If Beaver-Tel chooses to use the network then it must pay you half the cost of construction, SlOOm. But competition from Beaver-Tel will lower the total revenue from 3 Labrador-net in Rocky Falls. If the optic fibre provision is a success, and Beaver-Tel is a producer, then the present value of total revenue is only $280m, or $140m each for your company and Beaver-Tel. If La bradornet is unsuccessful, and Beaver-Tel is a producer, then the present value of total revenue is only SlOOm, or S50m each for your company and Beaver-Tel. Note that Beaver-Tel will never build its own network. (b) Suppose that Beaver-Tel must decide whether it wants to use the Labrador-net optic fibre network before you build your network. Thus, if it wants to use your network it must tell you before you build the network. Will Beaver-Tel decide to use your network, or not? Will Labrador-net build the network, or not? Explain your answer. [10 marks] (C) N) Suppose that Beaver-Tel only has to decide whether or not it wants to use the Labrador- net optic fibre network after it has seen whether this is successful or unsuccessful. If it decides to use your network it only has to pay you $100m after it makes its decision. Draw the game tree representing the interaction between your firm and BeaverTel. When, if ever, will BeaverTel want to use your network? Will you build the network or not? Is your decision the same or different to your decision in part (b)? Explain. [10 marks] It is sometimes argued that regulation, which improves competition, can reduce risky investment. Does your answer to this question confirm or rebut this claim? Briefly explain why regulation might influence risky investment. [10 marks]