Why will the bank be willing to extend loans in given case

Assignment Help Microeconomics
Reference no: EM131916116

Problem

Consider the same economy as in exercise 7, but suppose that we now have y = $380, δ = 0.75, and K = $150. Assume that the bank is perfectly competitive, that the borrowers are protected by limited liability, and that the production technology has constant returns to scale (if the loan increases by a factor λ, the borrower's return will increase by a factor λ).

a. Will the bank be willing to extend loans in this case?

b. Now suppose that instead of extending the same loan at date 2, the bank can increase the size of the loan by a factor λ = 1.5 in period 2. Would you expect the bank to actually offer this contract? Briefly explain your answer.

Reference no: EM131916116

Questions Cloud

Why the coffee shop manager should measure elasticity : Explain why the coffee shop manager should measure elasticity using the mid-point method in his calculations.
Define the gross repayment r that would enable the bank : Define the gross repayment R* that would enable the bank to elicit effort and debt repayments from the borrower at date 1.
What are the characteristics of an idea that deserves : What are the angels in the capital world and what role do they play? What is the P/E ratio and what is the market cap?
The value of the property using the capitalization formula : Investor thompson is seriously considering the acquisition of a rental property with a potential gross income of $43,200.00 per annum.
Why will the bank be willing to extend loans in given case : Consider the same economy as in exercise 7, but suppose that we now have y = $380, d = 0.75 and K = $150. Why will the bank be willing to extend loans in case?
How much money can you expect to earn in this period of time : How much will he have to invest today so that the investment will be worth $29,000 in six years?
How much should laura include in her 2016 taxable income : How much should Laura include in her 2016 taxable income as alimony? Calculate Melissa's tax liability.
What is the minimum gross repayment r : What is the minimum gross repayment R* for each I loan at which the banks would be willing to lend?
What is the lower boundary for this stock : General Motors (GM) just paid a dividend of $5.00 per share, which is expected to increase by 4.0 percent per year.

Reviews

Write a Review

Microeconomics Questions & Answers

  Leakage adjusted money multiplier

Assume the ratio of deposits that banks hold in the form of reserves is 7 percent. Assume further that people want to hold 8 percent of their deposits in the form of cash.

  Monopoly with a elastic demand curve

A monopoly with a more elastic demand curve will have more market power and monopolist can earn positive profits in the long run because it has market power

  Economic theory to create value for the firm

Apply the theories, models, and practices of economic theory to create value for the firm. Analyze solutions with support from relevant data, resources, references, and economic principles.

  Systems is a manufacturer of vertical compactors

V-Tek Systems is a manufacturer of vertical compactors, and it is examining its cash flow requirements for the next five years. The company expects to replace office machines and computer equipment at various times over the 5-year planning period.

  Why as output increases total cost eventually rises faster

Briefly explain why as output increases total cost eventually rises faster than total revenue for a perfectly competitive firm.

  Why are security prices and interest rates inversely related

How might the payments system evolve over time to reduce transactions costs for society? Why are security prices and interest rates inversely related?

  Supreme planning board that transmitted economic

In the former Soviet economy, the supreme planning board that transmitted economic decisions down to producing and consuming units was called the

  Discuss pros of allowing internet users to remain anonymous

In order to promote creativity, the internet is designed to allow for anonymity. Discuss the pros and cons of allowing internet users to be remain anonymous (2-3 sentences each).

  Relationship of the international business firm with govt

relationship of the international business firm with the local government

  Pigouvian tax-externalities

The private marginal benefit for commodity X is given by 10 - X where X is the number of units consumed. The private marginal cost of producing X is constant at $5. For each unit of X produced, an external cost of $2 is imposed on members of socie..

  A description of blue ocean strategy and its importance

A description of blue ocean strategy and its importance

  Analyze order by figuring out the total relevant cost

If they sell at the same price, should they accept this order? Analyze this by figuring out the total relevant cost and compare this to the retail price.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd