A large number of independent loan prospects are available , each paying a net return (on $100 ) of $16 with probability 3/4 and $4 with probability 1/4. There are as many savers each with $100 to lend , as there are loans . Each saver derives Utility (U) from income (I) according to:

U = sqrt(I)

There is competition between intermediaries and each has costs --including "normal " profits --of .40 on every $100 invested

1. What return will intermediaries pay ? Why ?

2. At this rate will they attract savers away from " going -it - alone-- i.e. from lending directly , with each saver making a single loan ? How do you know ?

3. What is the gain in utility per saver from the existence ofintermediaries ?

4. If there were a single intermediary with no competition , what return would the intermediary seeking maximum profit offer ? Explain .

ASAP PLEASE ...ASAP