(Solved): Exercise 1 Consider the fixed investment model analysed in class, and assume that I = 6. The proje ...

Exercise 1 Consider the fixed investment model analysed in class, and assume that I = 6. The project yields a return R = 12 in the case of success, and 0 in the case of failure. The probability of success is pH = 2/3 if the entrepreneur behaves and PL = 0 if he misbehaves, in which case he obtains a private benefit B = 6. The entrepreneur starts with cash A. (i) Write down the entrepreneur's optimisation problem. (ii) Derive the financing condition and the minimum wealth A necessary to access to external financing.