Will the borrower be able to obtain the required funds

Assignment Help Microeconomics

Reference no: EM132174802

Question: Consider an economy with risk neutral individuals. There is a borrower who wants to run a project with a required investment of $100. If the borrower puts enough effort into her project, she will succeed with probability 0.9 and get a gross revenue of y = $150. Otherwise, she fails and gets nothing. But if the borrower's effort level is low, the probability that she will obtain the gross revenue y = $150 is only 0.75. Effort is costly for the borrower, costing c = $18. The bank's gross cost of lending is $115. Assume that the lender just wants to break even, and that the borrower cannot repay more than her current income. a. Show that investment in this case is socially efficient only if the borrower puts forth an "adequate" level of effort.

b. Compute the threshold interest rate (the maximum rate) that the lender can charge to induce an adequate effort level from the borrower.

c. Will the borrower be able to obtain the required funds from the lender? (Assume that the opportunity cost for the borrower is zero.)

d. Briefly explain the main insights gained from this ex ante moral hazard exercise for the particular case of microfinance institutions.

Reference no: EM132174802

Questions Cloud

Compute square roots of inputs until she presses the enter : Package Newton's method for approximating square roots in a function named newton.

Which is run by association of amateur railway enthusiasts : Stephanie visits the Leura Miniature Railway Park, which is run by an association of amateur railway enthusiasts.

Significance of a normal chest exam : In a case of seizures, what is the significance of a normal chest exam?

Write a function that expects two parameters : Using python, write a function that expects two parameters, one will be the amount of the dinner check (a float).

Will the borrower be able to obtain the required funds : Consider an economy with risk neutral individuals. There is a borrower who wants to run a project with a required investment of $100.

Monohybrid cross in terms of punnet squares : Whats the difference between a Dihybrid and a Monohybrid cross in terms of punnet squares? (In a Biological sense)

Write your own algorithm for computing square roots : Develop and write your own algorithm for computing square roots. One way to approach this is by guessing and testing until a good approximation is found.

Offered exciting new job in brisbane provided : They had become close friends. Jennifer was offered an exciting new job in Brisbane provided that she can take up the position in seven days.

Distinguish between entrepreneurs of different types : A microfinance institution aims to break even. Its manager cannot distinguish between entrepreneurs of different types, but she knows that the population.

User Account

All Pages