Kyle Wu
Student ID: 2310368
Econ 411—Problem Set 1
Sept. 10th, 2020
1. [Q.2 in the book, 2nd edition, Chapter 1] Suppose an owner of a corporation needs
$1 million to finance a new investment. If his total wealth is $1.2 million, would it better
to use his own funds for the investment or to issue stock in the corporation? What if the
owner’s wealth is $1 billion?
If the owner’s total wealth is $1.2 million, it would be better for him to issue stock
in his corporation instead of using his own funds for the investment. This is
because the total wealth of $1.2 million barely covers the $1 million needed to
finance the new investment, and the owner will assume huge risks by investing
$1 million of his own wealth in the corporation (due to a lack of diversification).
Therefore, it is better for him to issue stock in the corporation to avoid such risks.
On the other hand, if the owner’s total wealth is $1 billion, it would be better for
him to use his own funds for the investment. Since the $1 million needed is only
0.1% of his total wealth, the owner can easily finance the investment himself and
