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2. Consider the model of Moral Hazard where firms choose between investing one unit of output in a less risky or more risky project. The

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2. Consider the model of Moral Hazard where firms choose between investing one unit of output in a less risky or more risky project. The safer project yields with probability and zero otherwise while the risky project yields 2 with probability to and zero otherwise i.e. TG = G = TB = 1. B = 2. Suppose firms finance their investment by borrowing 1 unit from a the financial market at interest rate R. The financial market is risk neutral and requires an expected rate of return equal to the risk free rate which is assumed to be zero. Will there be an equilibrium with lending to firms from the financial market A. Yes B. No C. Not enough information D. None of A-C O a. A O b. B . O d. D 2. Consider the model of Moral Hazard where firms choose between investing one unit of output in a less risky or more risky project. The safer project yields with probability and zero otherwise while the risky project yields 2 with probability to and zero otherwise i.e. TG = G = TB = 1. B = 2. Suppose firms finance their investment by borrowing 1 unit from a the financial market at interest rate R. The financial market is risk neutral and requires an expected rate of return equal to the risk free rate which is assumed to be zero. Will there be an equilibrium with lending to firms from the financial market A. Yes B. No C. Not enough information D. None of A-C O a. A O b. B . O d. D

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