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Consider the case of Henrietta Ketchup, a budding entrepreneur with two possible investment projects that offer...

Consider the case of Henrietta Ketchup, a budding entrepreneur with two possible investment projects that offer the following payoffs (assuming zero discount rate and zero interest):

• Project 1: Investment now: 12. Payoff one year from now: 15 with probability 1.
• Project 2: Investment now: 12. Payoff one year from now: 24 with probability 0.4 and 0 with probability 0.6.

(a) Calculate the expected payoffs to the bank and Ms. Ketchup if the bank lends the present value of $10. Which project would Ms. Ketchup undertake?
(b) What is the maximum amount the bank could lend that would induce Ms. Ketchup to take project 1?

Math   Statistics-And-Probability   
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