1.A firm produces electrically-assisted e-bikes. Currently, it produces a hybrid (“H”) model,which recharges the battery using the cyclist’s peddling energy. It has recently developedplans to switch to producing a plug-in (“P”) model whose battery must be charged froman EV charging socket. The firm is aware that the government is thinking about subsidisingenhancements to the UK’s charging infrastructure, which would increase demand for theP model – this decision will be taken at the beginning of year 2, will take effect immediatelyand cannot be reversed. Currently, the firm estimates the associated costs and revenuesas shown in the following Table. Annual costs for the H and P technologies are denoted퐶퐻or퐶푃; revenues frommodel푖∈{퐻,푃}in state푘∈{푆,푁}for Subsidy (푆) or No Subsidy(푁) are denoted푅푘푖If the firm switches to the plug-in (P) model now, the new facility will not come onstreamtillnext year; this year, the firm will pay the set-up cost푆퐶and the annual cost퐶퐻ofproducing the existing Hybrid (H) model and get revenues푅푁퐻.From next period onwards,the firm willpay annual cost퐶푃and get the relevantrevenues(depending on thegovernment’s decision regarding the subsidy policy).The firm’s share price is correlated with the government decision as shown in the abovetable. After next period, the firm continues producing the chosen model (H or P) forever.