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Practice problem--it's very helpful ~

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Department
Economics
Course
ECO359H5
Professor
Sun
Semester
Summer

Description
ECO3592011 UniversityofToronto PracticeProblems6 DepartmentofEconomics ECO 359 Practice Problems 6 1. An entrepreneur has access to a project, which generates future revenue of 20 or 4 and requires an initial cost of 5. When he exerts an effort level ) >HI? for the project, the project generates revenue 20 with probability) and revenue 4 with probability I . ). His $ utility is reduced by IN) . The initial cost must be financed by issuing either debt or equity. The entrepreneur can choose his effort level at will after debt or equity is issued. Both the entrepreneur and investors are risk neutral and there is no discounting. (a) Can the project be financed when he issues debt? (b) Can the project be financed when he issues equity? 2. Miranda is considering running for society-presidency. If she runs and is successful, she becomes the societys president and gets a payoff of : L IJH. If shes unsuccessful, she becomes vice-president and gets a payoff of : L KH. The fixed costs of running are F = 50. The probability of the high outcome depends on the effort that Miranda puts in. Her effort is a continuous variable in >HI?, and the probability
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