Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: daixieit

ECM 311 Business Economics: Second Written Assignment (including essay)

This assessment is individual work. It counts for 70% of the overall mark. The typed solutions should be uploaded on the ECM311 submission point on Moodle. Please answer all questions. The questions are equally weighted. Feel free to make use of other materials, but make sure you reference appropriately. Please make sure you do not fall foul of the academic misconduct regulations https://studenthub.city.ac.uk/help-and-support/academic-integrity-and-misconduct 

1. Taking into account the two articles “Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have” by Myers and Majluf and “Equity Financing in a Myers-Majluf Framework with Private Benefits of Control” by Wu and Wang, (accessible on Moodle) discuss and explain why firms may prefer internal to external funds, and equity to external financing when investing and the impact of private benefits and asymmetric information on announcement effects and on over- and/or underinvestment. (750 words maximum +/- 10%).

2. What are the key managerial insights derived from game theory? Which one is the most important? Discuss. Provide examples of these insights applied to business problems. (750 word maximum +/- 10%) 

3. 

a. Suppose that Company A’s stock returns are negatively correlated with the FTSE100 index, positively correlated with the S&P500 index and uncorrelated with the DAX index. The CEO is risk averse. Using optimal incentive pay, which indices, if any, should be used in the determination of the compensation package of the CEO? Should the CEO’s compensation package (optimally) be positively or negatively related to the respective index? Explain and justify. Explain the principle that you use to answer this question (1/2)

b. Taking into account the article by Bebchuk et al “The Wages of Failure”, discuss the disadvantages of incentive pay and the problems of incentive pay in the case of Bear Stearns and Lehman Brothers. Also discuss reforming incentive pay to deal with the problems that arose at Bear Stearns and Lehman Brothers. (1/2)

4. Some adults play the game of chicken in the evening. Two drivers drive their cars at each other at high speeds on a one-way street. The first to swerve to the side is the “chicken” and loses. If both swerve to the side, they are both “chickens” and both lose. Neither driver wants to get into a car accident because it causes a significant loss and probably death. Both do not want to be known as “chickens” which causes some loss in utility.

a. Derive the strategic form (normal form) of the game by displaying the payoff matrix. Justify the payoffs and make sure they correspond to the situation above. Explain. (1/4)

b. Define and explain the concept of strictly dominated strategies. Does this game have strictly dominated strategies? If so, what are they? Explain. (1/4)

c. Define the concept of Nash equilibrium in economic terms. Determine the (pure strategy) Nash equilibrium (equilibria) in this game. Interpret the Nash equilibrium (equilibria) (1/4)

d. Explain the concept of mixed strategy Nash equilibrium. Determine the mixed strategy Nash equilibrium. Explain. Why do some economists criticise the notion of mixed strategy Nash equilibrium? Provide reasons for and reasons against mixed strategy Nash equilibria. (1/4)

5.  

a) Using divisional performance evaluation, explain the performance evaluation of cost centres, expense centers, revenue centers and investment centers and its challenges to profit maximization of the overall corporation. (1/3)

b) Illustrate verbally, graphically and with a numerical example the double marginalization problem between a manufacturing division and sales division under asymmetric information, where the manufacturing division determines the price charged to the sales division (transfer price). Discuss the optimal transfer pricing between business units in economic terms. Explain different methods of determining transfer prices and its advantages and disadvantages. (1/3)

c) The French tax for digital services aims at corporations with an annual global sales of €750 million and at least €25 million in France. This includes, for example Google, Facebook, Apple and Amazon. In light of the role of setting transfer prices and divisional performance evaluation, discuss the difficulties of implementing a tax on profits that raises significant revenue for the government. (1/3)