Consider an economy with a large number of potential online game providers. The provider lacks the funds to start their projects. There is an equal number of investors who have the funds but no desire to create online games. Each investor has 10 goods to invest. Each online game requires 20 goods to create. Suppose each investor can choose up to 10 online games. Assume that 25 percent of the online game projects fail and return zero goods to the investor. The monitoring cost is 1 good per failed project.
a. Compute the expected total return for each investor when the investor chooses 10 projects and divides to goods evenly amongst all 10 projects.
b. Compute the expected total return for each investor when the investor chooses one project.
c. Explain why the expected total return is greater when only one project is funded by the investor.