Consider an economy with a large number of potential online game providers. The provider lacks the funds to start their projects. There is an equal number of investors who have the funds but no desire to create online games. Each investor has 50 goods to invest. Each online game requires 200 goods to create. Assume that 25 percent of the online game projects fail and return zero goods to the investor. The monitoring cost is two goods per failed project. Assume that a bank operates costlessly in this economy. Also assume there are no barriers to entry in the banking industry.
a. Compute the expected return for each game project for the bank.
b. What return will the bank offer a depositor?