1. Assume that firms have their choice of investment project. A safe investment of $100 turns into $110 with certainty. A risky investment is equally likely to turn $100 into $200 or $0. Everyone is risk neutral and the risk-free rate is 3%. There are 60 identical firms that seek to maximize expected profit. Lenders cannot observe a firm's choice of project.

f. Assume instead that savers deposit their surplus funds in a bank that pays them the cost of funds. If a project costs $300, how much is the bank willing to spend on monitoring? Does the bank monitor?