Abank is being subsidized by the government in the following way:

Each time the bank extends a 1,000-peso loan, it gets a subsidy of 200 pesos. There are two potential borrowers to which the manager of the bank can extend a subsidized loan. A borrower of type A promises to repay 50 percent of her profit on the 1,000-peso loan. A borrower of type B promises to repay 10 percent of her profit. However, A can generate a gross return of 1,200 pesos with probability 0.8, and nothing with probability of 0.2, while borrower B can generate a gross return of 1,100 pesos with certainty.

a. Define “social efficiency” and explain which of the two projects is socially efficient?

b. Which of the borrowers will the manager choose to finance if they want to maximize expected profits?