1.a)Suppose that in the population there are 50% risky types and 50% safe types. Risky types default with probability 25% and earn a return of R'=1.5. Safe types never default and earn a return of R=1.1. The loan size is fixed at L=1. What is the interest rate that the lender will charge in this scenario in % (so 10 means 10%)?

b) Now suppose that everything is the same as the previous question but the safe type returns R=1.4. What is the interest rate (in %) that the lender charges in this case? [10 means 10%]