Large number of independent loan prospects

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Large number of independent loan prospects are available, each paying return of $16 on $100 with probability of 1/2 and 1/2 of $4 return. Each saver in economy derives happiness from income according to: H= I^(1/2) Competition between banks so each have costs--including normal profits--of .1 on every $100. What return will banks pay? Why? At this rate will they attract savers away from "going it alone" from lending directly, with each saver making a single loan? How do you know? What is the gain in happiness per saver from the existence of intermediaries? If there were a single intermediary with no competition, what return would the intermediary seeking maxim profit offer? Explain

Reference no: EM131005123

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