Assume that there are two types of borrowers high and low. The high type occurs with probability 0.75 and the low type occurs with probability 0.25. The high type succeeds and generates a gross return of 2 with probability 0.8 and fails and generates a gross return of 0 with probability 0.2. The low type succeeds and generates a gross return of 10 with probability 0.2 and fails and generates a gros return of 0 with probability 0.8. Assume limited liability. In addition, assume that the banking sector is competitive. Furthermore, assume that a commercial bank can secure a gross return of 1 if it makes a deposit at the central bank. Finally, assume that the two types of potential borrowers are DISTINGUISHABLE. What should the gross interest (1+r) charged on loans to low type be in this case? O It should be charged 1 O It should be charged 10
Assume that there are two types of borrowers high and low. The high type occurs with probability 0.75 and the low type occurs with probability 0.25. The high type succeeds and generates a gross return of 2 with probability 0.8 and fails and generates a gross return of 0 with probability 0.2. The low type succeeds and generates a gross return of 10 with probability 0.2 and fails and generates a gros return of 0 with probability 0.8. Assume limited liability. In addition, assume that the banking sector is competitive. Furthermore, assume that a commercial bank can secure a gross return of 1 if it makes a deposit at the central bank. Finally, assume that the two types of potential borrowers are DISTINGUISHABLE. What should the gross interest (1+r) charged on loans to low type be in this case? O It should be charged 1 O It should be charged 10
A First Course in Probability (10th Edition)
10th Edition
ISBN:9780134753119
Author:Sheldon Ross
Publisher:Sheldon Ross
Chapter1: Combinatorial Analysis
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Problem 1.1P: a. How many different 7-place license plates are possible if the first 2 places are for letters and...
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Transcribed Image Text:Assume that there are two types of borrowers high and low. The high type occurs with probability 0.75 and the low type occurs with
probability 0.25. The high type succeeds and generates a gross return of 2 with probability 0.8 and fails and generates a gross return
of 0 with probability 0.2. The low type succeeds and generates a gross return of 10 with probability 0.2 and fails and generates a gross
return of 0 with probability 0.8. Assume limited liability. In addition, assume that the banking sector is competitive. Furthermore,
assume that a commercial bank can secure a gross return of 1 if it makes a deposit at the central bank. Finally, assume that the two
types of potential borrowers are DISTINGUISHABLE. What should the gross interest (1+r) charged on loans to low type be in this
case?
O It should be charged 1
O It should be charged 10
It should be charged 5
It should be denied loans altogether
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