Suppose that there are two types of entrepreneur: skilled and unskilled. Skilled entrepreneurs have a probability p = 2/3 of success if they get the loan
Suppose that there are two types of entrepreneur: skilled and unskilled. Skilled entrepreneurs have a probability p = 2/3 of success if they get the loan
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Suppose that there are two types of entrepreneur: skilled and
unskilled. Skilled entrepreneurs have a probability p = 2/3 of success if they get the loan. Unskilled
entrepreneurs have zero chance of being successful. Despite that, assume that unskilled entrepreneurs
want to take up the loan, because it is cool to say you have a startup. The bank does not observe skill.
The share of skilled entrepreneurs is s.
Question 1:
1A). TRUE OR FALSE: If L = 2, R = 6, and s = 0.5, then the bank would have zero expected profits, but
entrepreneurs would never take up the loan.
1B. ) TRUE OR FALSE: If the loan amount is L = 2, the payback amount is R = 3, and the share of skilled
entrepreneurs is s = 0.9, then the bank will have positive expected profits.
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