Reference no: EM132491860

Consider an economy with a large number of restaurants. The restauranteur lacks the funds to start the restaurant. There is an equal number of investors who have the funds but no desire run a restaurant, say 2 trillion investors. Each investor has 10 goods to invest. Each restauranteur requires 20 goods. Assume that 20% of the restaurants fail and return zero goods to the investor and the remaining 80% return 40 goods. The monitoring cost is 10 good per failed project.

a) Compute the expected total return for each investor

b) Compute the expected return for each investor when there are competitive banks that operate without any costs

c) Compare the outcomes of part (b) to that of part (a)