1. An entrepreneur has two projects to choose between. Both require an investment of S1 which must be borrowed. The projects produce gross returns in one year as follows Project payoff if failure (S) payoff if success (S) probability of success Risky Safe 10 2/10 6/10 Suppose there are 100 such entrepreneurs.There is a single bank with S50 to lend. The bank cannot observe the project choice of the entrepreneurs. Call the gross re requires when the project succeeds R: payment the loan i. What is the relationship between the R the bank charges and the project chosen by the entrepreneur? Explain in detail. ii. Over what ranges of R will the safe and risky projects, respectively, be chosen? What is the maximum R the bank can charge consistent with the entrepreneur choosing the safe project? Explain. iii. What R will the bank charge and why? iv. Will there be credit rationing? 1. An entrepreneur has two projects to choose between. Both require an investment of S1 which must be borrowed. The projects produce gross returns in one year as follows Project payoff if failure (S) payoff if success (S) probability of success Risky Safe 10 2/10 6/10 Suppose there are 100 such entrepreneurs.There is a single bank with S50 to lend. The bank cannot observe the project choice of the entrepreneurs. Call the gross re requires when the project succeeds R: payment the loan i. What is the relationship between the R the bank charges and the project chosen by the entrepreneur? Explain in detail. ii. Over what ranges of R will the safe and risky projects, respectively, be chosen? What is the maximum R the bank can charge consistent with the entrepreneur choosing the safe project? Explain. iii. What R will the bank charge and why? iv. Will there be credit rationing