Large number of independent loan prospects

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A large number of independent loan prospects are available, each paying a net return (on $100) of $24 with probability 1/4 and $4 with probability 3/4. There are as many savers, each with $100 to lend, as there are loans. Each saver derives Utility (U) from Income (I). There is a competition between intermediaries and each has costs--including "normal" profits--of $0.40 on every $100 invested. What return will intermediaries pay? Why? At this rate will they attract savers away from "going-it alone" from lending directly, with each saver making a single loan? How do you know? What is the gain in Happiness per saver from the existence of intermediaries? If there were a single intermediary with no competition, what return would the intermediary seeking maximum profit offer? Explain.

Reference no: EM133084255

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