What is the price of the project after a good outcome (Pg ) and a bad outcome (Pb )? Assume that we calculate the price after the payment of the first outcome and the next payment will be in the next period. In other words, the price does not incorporate the first payment but incorporates the discounted value of the second payment. c) [10 points] What is the price of the project before observing any outcome (P0 )? Assume that the first payment will be in the next period. In other words, start discounting from the first payment. d) [5 points] After the project delivered a bad outcome, a friend of yours told you that the price of a bad project is significantly lower that the price you found in the previous part. So, he concluded that this is a violation of the efficient market hypothesis. Do you agree with your friend? Why? You don't need to calculate anything. There is another part of this question on the next page. Pg = . Pb = . P0 = . e) [5 points] Now suppose that the time period is not two, but the project continues to generate outcomes for infinity. Explain why a long period of good outcomes generates a higher sensitivity of prices to a bad outcome. In other words, why a bad outcome leads to a higher decrease in price when h = ggggggggg compared to h = g ? You don't need to calculate anything.

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c To calculate the price of the project before observing any outcome P0 we need to discount the expe... View the full answer