QUESTION 3The table below summarises the potential net benefit for four individuals involved in four distinct projects. Which statement in relation to Pareto conditions is most correct? Project A Project B Project CProject DBob48362412Anna33276845David-88-34-6425Caroline63-25-4226Both project A and project B are examples of potential Pareto improvement. Project C is an example of strict Pareto improvement. Only project A represents an example of potential Pareto improvement.Both project A and project B are an example of strict Pareto improvement.

Consider the payoffs below Project ABCJake-10205Flynn51-5Sean101-1Project C can be described as:none of the answers is correcta Pareto improvementa potential Pareto improvementneither a potential for Pareto improvement or an actual Pareto improvement

Complete this question in ExcelSocial Cost(in millions)Social Benefit(in millions)Net Social Benefit(in millions)Project A 1 10Project B 10 30Project C 4 8Project D 10 8Project E 7 21a) Using the information in the above table, calculate the net social benefit.b) If the projects are mutually exclusive, which project should be selected. Justify youranswer.c) If the projects are not mutually exclusive, which project(s) should be selected. Justifyyour answer.

If the projects in Table 1 are mutually exclusive and the required rate of return is 10%, which of the projects is chosen by NPV?Project AProject BProject B and Project CProject A and Project BProject C

The table below lists four mutually exclusive projects.Which project runs at the highest equivalent annual net cost?Assume an 8% discount rate?  Total Operating Cost (PV) Project life (years)Project A 40000 8Project B 37500 7Project C 38500 6Project D 35500 5

CEO Alice needs to choose among four projects. She hiresBob to recommend a project to her. The four projects are of three types, A, B, and D. One project is of type A,one project is of type B and two projects are of type D. Both Alice’s and Bob’s payoffs depend on the types of theproject implemented, as summarized in the following table. The payoffs are “utility indices” whose expectation iswhat players try to maximize.Throughout the question, we assume that Alice cannot observe the types of the four projects: the four projects lookidentical to her. The timing is as follows.(1) Bob recommends a project based on his knowledge.Project type Alice’s payoff Bob’s payoffA 10 6B 6 10D -100 -1001(2) Alice chooses among three options: implementing the project recommended by Bob, implementing a randomlychosen project not recommended by Bob, and doing nothing. Doing nothing gives both players zero payoff.(a) [5 marks] First, assume that Bob knows nothing more than Alice. Therefore, he randomly recommends aproject, which is of types A with probability 1/4, B with probability 1/4, and D with probability 1/2. Determinewhat Alice should do in this case.(b) [15 marks] Now assume that Bob knows the types of the four projects. We model the interaction betweenAlice and Bob as a strategic form game. Bob chooses which project to recommend (A, B or D) and Alicechooses among C (accepting the recommendation), R (rejecting the recommendation and choosing randomlybetween the remaining three projects) and N (doing nothing). Write down the payoff matrix of the game andfind all Nash equilibria (in pure strategy). (Hint: first, figure out the probabilities that Alice’s randomly chosenproject is of type A, B and D if she rejects Bob’s recommendation.)(c) [5 marks] Discuss why hiring Bob (whose salary is negligible compared with project payoffs) may help Aliceeven though their interests are not perfectly aligned.