Imagine that there are two types - high and low- of potential borrowers. Both exist in equal proportion in the population. The high type has access to a technology that generates a gross return of 2 with probability 0.8 and a gross return of O with probability equal to 0.2. The low type can generate a gross return of 5 with probability 0.1 and a gross return of O with probability equal to 0.9. Assume that commercial banks can secure a gross return of 1 by making a deposit at the FED. If a commercial bank operating in a competitive market could distinguish between the two types then it should charge a gross interest rate of None of the above O 1 to both types O 5 to the low type O 5/4 to the high type

Imagine that there are two types - high and low- of potential borrowers. Both exist in equal proportion in the population. The high type has access to a technology that generates a gross return of 2 with probability 0.8 and a gross return of O with probability equal to 0.2. The low type can generate a gross return of 5 with probability 0.1 and a gross return of O with probability equal to 0.9. Assume that commercial banks can secure a gross return of 1 by making a deposit at the FED. If a commercial bank operating in a competitive market could distinguish between the two types then it should charge a gross interest rate of None of the above O 1 to both types O 5 to the low type O 5/4 to the high type

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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