Comment on what this exercise reveals

Assignment Help Microeconomics

Reference no: EM132174809

Question: Consider the case of two borrowers who are equally productive. Borrower 1 is considered to be "rich" as she has cash equivalent to A = $50 in her pocket. Borrower 2 is considered to be "poor" as she has zero cash in her pocket. Both borrowers are interested in a project that requires an initial investment of $100. If they put forth a sufficient level of effort, they can both get a gross return y = $300 with certainty. Otherwise, both borrowers succeed with probability 0.25. The cost of exerting effort for both borrowers is c = $145. The necessary funds for financing the project may come either from borrowing or from the potential investors' own pockets. The gross cost of lending capital per dollar for a competitive bank is k = $1.50.

a. Show that only the rich borrower can invest and comment on the efficiency of this result.

b. Comment on what this exercise reveals, given the asymmetric value of financial access at different levels of wealth.

Reference no: EM132174809

Questions Cloud

Write a program to assign passaengers seats in an airplane : Write a program to assign passaengers seats in an airplane. Assume a small airplane with seat numbering as follows.

Complete the ratio analysis table in the peer group : Complete the Ratio Analysis table in the Peer Group section of the financial portion of the business plan - Ration Comparison listing each full years results

Central tendencies within culture are known : Central tendencies within a culture are known as. All of the following are examples that enhance virtual team work, EXCEPT.

How a stack-based calculator works : Perform the operation on the result of the last operation and the last entered integer. (i.e. pop the top two integers from the stack.)

Comment on what this exercise reveals : Consider the case of two borrowers who are equally productive. Borrower 1 is considered to be "rich" as she has cash equivalent to A = $50 in her pocket.

Show that only the one with collateral can borrow : Assume that borrowers are not very poor, in that they have some collateral, but they are nevertheless suffering from financial exclusion.

What intellectual human resources management : What intellectual human resources management school of thought underlies your recommended changes?

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.

User Account

All Pages