Uncertainty about the future and firm’s investment. Consider a firm that operates for two periods using capital and labor to produce.

Uncertainty about the future and firm’s investment.

Consider a firm that operates for two periods using capital and labor to produce. The firm starts with K units capital and has to decide optimally its labor demand for both periods and the investment so as to maximize the discounted value of profits. When the firm chooses the investment it is uncertain about the value of future productivity. The firm thinks that with probability p the productivity is going to be high (zh), and with probability 1 − p it is going to be zero, so that no production takes place in the future (no labor is hired and no capital is used, so there is no depreciation). Note that it is only profitable to invest when z’ is higher than zero.

Since the firm does not know for sure the value of z’ , it maximizes the expected value of profits

(a) What are the profits in the second period if z’ = zh?

(b) What are profits in the second period if z’ = 0?

(c) What is the optimality condition for investment? Interpret it.

(d) Note that when p = 1 this problem is the same as the one in the book. How does the investment demand change when p < 1? Explain.

Show more

Calculate Your Essay Price
(550 words)

Approximate price: $22

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
The price is based on these factors:
Academic level
Number of pages
Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read more

Privacy policy

Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read more

Fair-cooperation guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more

Order your essay today and save 10% with the coupon code: best10