QUESTION 2: Doge you forget about me [20 points]

Because we are well into the throes of late-stage capitalism, everyone has decided to stop trying to sell actual goods and services in exchange for money. Instead, you've decided to invest your life savings on some initial coin offerings in the hopes of striking it rich. There are two types of alt-coins: the next big thing (NBT) and sh*tcoins (SC). For each coin, there are two outcomes, it can catch on and become a success, or it can fail to launch. The ultimate value of a coin depends on whether it succeeds or fails. The two different types of coins vary in the probability that they catch on and become a success. The value of each coin type, and the probability of success is given below. (NBT) coins have a 50% chance of success while (SC)'s have a 10% chance of success because YOLO TO THE MOON.

Success Failure Prob(Success) Next Big Thing (NBT) $100 $20 50% Sh*tCoin (SC) $100 0 10%

For all questions, you can ignore risk aversion and focus on expected values. To be clear, there will be lots of new coins offered in the market: e.g., Bitcoin, Ether, Ripple, Dogecoin, ScamCoin, etc. Each of these coins is either an (NBT) or (SC).

(a) [3 points] What is the most you would pay for a coin that you are sure is next big thing (NBT)?

(b) [3 points] What is the most you would pay for a coin that you are sure is (SC)? (c) [3 points] If any new coin has a 50-50 chance of being NBT or SC, what is the MOST you would be willing to pay for a randomly chosen new coin? Final Exam 7 (d) [3 points] Suppose that sellers know the type of the coins they're producing, (NBT) or (SC), but not whether the coin will ultimately succeed or fail. Also suppose that sellers are desperate for liquidity. A seller of an (SC) coin is willing to sell for any price above $8, and a seller of an (NBT) coin is willing to sell at any price above $40. Which sellers of which types of coins, if any, will sell you a coin for the amount you answered in

(c)? (e) [5 points] Suppose there is an unregulated market for each new coin and that Everybody knows the probabilities and values in the tables above, Buyers don't know the type of a given coin, Sellers know the type of the coin they sell, but not whether the coin will succeed or fail, Buyers rely on expected values based on the above table. There is free entry of sellers, all of whom produce coins as described in

(d). Each unit of a given coin is a perfect substitute for another unit of the same coin. Which type(s) of new coins, if any, will be transacted, and at what price?

(f) [3 points] Even (NBT)'s are "risky" investments because they may still be a "success" or a failure. Describe the role that network effects play in the "success" of payment methods, and why "success" may ultimately be hard to predict.

(g) [1 Bonus Point] The title of the question is based on a song made famous by which 1985 movie?