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Suppose that the demand for loans depends on the annual interest rate charged (ir), the annual fee charged (F), and the unemployment rate. Each loan is a $100,000, 30 year fixed APR mortgage. Assume that the unemployment rate is 5% (U).
Q = 125 - 624ir + 0.26F - 90.4U
The bank has a monthly fixed cost of $10,000 plus an annual variable cost (interest paid on deposits plus various administrative expenses equal to 5% of the loans created)
Produce a Cost Function.
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