Question 4 Sebastian has an idea for a new business. The cost of the project is 20 million kronor. Sebastian doesn't have any money to invest himself, so he goes to the bank to borrow. If Sebastian works hard, the project is a success with probability 3/4 and generates revenue of 40 million kronor, which he can use to repay the loan. With probability 1/4 there is no revenue and Sebastian cannot repay the loan - since he does not have any money to invest the bank will in this case let him walk away without repaying. If Sebastian takes it easy and socializes, rather than works hard, he gets a private benefit that he values at 4 million. If Sebastian takes it easy and socializes the probability of success is for the new business is 1/4 (again with a revenue of 40 million kronor) and with probability 3/4 there would be no revenue. The bank cannot see how hard Sebastian works. a) Can theories of how markets work under asymmetric information be relevant for analyzing whether he gets a loan or not? How? (2 p) b ) Startup firms are often financed via private equity (the people who invest money become owners and take a seat on the board), rather than by banks. Can theories of how markets work under asymmetric information be relevant for understanding why? How? (2 P) c) The bank is taking a risk so it wants to get more than 20 million back if the project is successful. In the bank meeting one partner suggests that Sebastian pay 30 million in case the project is successful. Is this a good suggestion given the information above? Why/why not? (2 p ) d) Another partner thinks the bank is not compensated enough for the risk and suggests Sebastian pay 34 million in case the project is succesful. Is this a good suggestion given the information above? Why/why not? (2 p) e) Sebastian is at company event where everyone has gotten 10 vouchers for drinks and 10 vouchers for snacks. He considers potential trades with Christina. Drinks and snacks are perfect substitutes for Christina and her marginal rate of substitution is equal to 1. Drinks and snacks are perfect substitutes for Sebastian as well but his marginal rate of substitution is 2, such that he is always willing to trade 2 drinks for 1 snack and be equally well off. Use an Edgeworth box to illustrate the situation and indicate the area in which there are potential gains from trade and also indicate the pareto efficient allocations. (8 p)