4. Consider again the decision of the bank if the bank believes the borrower will not workhard.e. What is the expected profits E(II) if the bank lends to the borrower?f. Write down the zero profit condition.g. What is the interest rate that the bank will charge?5. Plug the interest rate you found in 4c in EUshirks (from question ld). What is the expectedutility obtained by a person who borrows and shirks? Will the person want to borrow atthat interest rate? (Assume that his utility is zero when not borrowing anything). Consider the problem of an entrepreneur/borrower with no money and a project requiring L=200to be carried out. Assume that the borrower cannot use his illiquid assets to finance the project.The entrepreneurOnce the entrepreneur undertakes the project, she decides either to work hard or to shirk.• If she works hard, then she earns a high return R=$500 with probability p=0.75 and earnsnothing with probability (1-p)=0.25.• If she shirks, she earns a high return with probability q=0.25 and earns nothing withprobability (1-q)=0.75.The borrower has ex-post utility u(y)=y-D if she works hard and u(y)=y if she does not workhard, where y is her income (after loan payments) carned from the project. Assume D=125.The bank:A bank is willing to finance the project and lend $200 to the borrower. The bank charges theagent an interest rate of i on the loan.The borrower always repays the loan when she succeeds. If she fails, she is protected by limitedliability: she repays nothing to the bank.Finally, assume that the bank could also purchase $200 in risk-free bonds with a return ofr=0.10, and that the financial markets are perfectly competitive.Section A1: No collateral1. The borrowerSuppose the borrower takes a loan of $200 from the bank. Supposethat the interest rate charged on the loan is i (we'll find i later).a. What is her ex post income yail if she fails? NOTE: I'm asking for realizedincome, NOT utility!b. What is her ex post income ysuceed if she succeeds? (hint: this will be a function ofthe interest i).

As per the question , Entrepreneur can work hard or shirk . Returns are same in both conditions but…

Consider the problem of an entrepreneur/borrower with no money and a project requiring L=200 to be carried out. Assume that the borrower cannot use his illiquid assets to finance the project. The entrepreneur Once the entrepreneur undertakes the project, she decides either to work hard or to shirk. • If she works hard, then she earns a high return R=$500 with probability p=0.75 and earns nothing with probability (1-p)=0.25. If she shirks, she earns a high return with probability q=0.25 and earns nothing with

Consider the problem of an entrepreneur/borrower with no money and a project requiring L=200 to be carried out. Assume that the borrower cannot use his illiquid assets to finance the project. The entrepreneur Once the entrepreneur undertakes the project, she decides either to work hard or to shirk. • If she works hard, then she earns a high return R=$500 with probability p=0.75 and earns nothing with probability (1-p)=0.25. If she shirks, she earns a high return with probability q=0.25 and earns nothing with

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.7P

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