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Credit Model consumer's utility ub = ucg ) + x- 4 produces's utility ? us =- c(q)+ x-4 Discounting = 1 Bargaining rule = even

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Credit Model consumer's utility ub = ucg ) + x- 4 produces's utility ? us =- c(q)+ x-4 Discounting = 1 Bargaining rule = even split of surplus. P = probability that consumer will produce in late subperiod Consumer's value function vb = [v(q )- py] + 1 vb a) what is the surplus and the quantity traded qar. How is it different from value under perfect credit (q*) b) Now assume producer's gain from trade = half of total surplus. solve for you . what happens to y's magnitude as a result of random default? ( Hint : p = 1 is same as perfect credit

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