.A lending company has $60,000 to lend out. ? Risk-free loans will be paid back in full next year with 12?% interest. Suppose there is a 25?% chance of defaulting and a 75?% chance of paying back the loan in full with 40?% interest.

i) Based on the information provided, how much profit can the lending institution expect to earn from a risk free loan?

ii) How much profit can the lending institution expect to earn from a risky loan?

iii) Now let's assume the lending company knows that the government will ? "bail out" if there is a default? in paying the original amount. What type of loans will the lending institution choose to?make?

iv) In case there is a bailout, what is the expected cost to the government?

v) Suppose that the lending company does not know for sure that there will be a bail?out, but one will occur with probability P. For what values of P will the lending institution make a risky loan?

b) i) Explain how it is possible for one of two people in a two-good economy to have an absolute advantage in producing both goods, but trade can still benefit both people?

ii) Can consumption efficiency be achieved even if the efficient product mix is not achieved?

iii) Suppose Mexico can produce 10 units of food and 5 units of clothing, and Canada can produce 6 units of food and 4 units of clothing. If trade occurs between these two countries, which country should produce more food and which more clothing?