Assume an entrepreneur has two projects to choose. Both require $100 investment. Assume the entrepreneur is risk-neutral.

Safe project: returns $140 for sure

Risky project: Returns $ 200 with 50% chance and $50 with 50% chance.

e. What is social net return on each project (i.e. entrepreneurs return and bank return)? Which project is optimal from societal point of view?

f. If bank required collateral of $100, what would be entrepreneurs return in each case? Which project will entrepreneur choose?

g. If 50% of all borrowers are safe and 50% are risky, what interest rate bank will need to charge to break even if no collateral is required?