Explain with one sentence: what is the risk premium we talked about in the credit market ? (5 points)

Assume that you always have the option to keep extra money in the bank at a 8% rate of interest, with no fear of losing any of this money. For each case: calculate the risk premium and the corresponding interest rate required by the lender, at which you would lend $10,000 on the informal market.

Case 1) With probability 3/5 the loan will be repaid with interest, and with probability 2/5 the loan will not be repaid at all. (10 points)

Case 2) Just as in case (a), except that if the loan is defaulted upon, there is probability 4/5 of recovering assets from the borrower worth $5,000.(10 points)

b) (15 points)

Using the models of nutritional status, please explain: 1) what is resting metabolism effect and what is capacity effect? 2) why do we have nutritional externality for casual labor markets?

Answer all parts, i'll upvote.