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Help with economics of banking question related to the book Microeconomics of banking: Bookby Xavier Freixas, Jean-Charles Rochet Please show detail working out on how

Help with economics of banking question related to the book

Microeconomics of banking: Bookby Xavier Freixas, Jean-Charles Rochet

Please show detail working out on how you got the answer

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14. Consider the model where there are two types of firms; a proportion f are strategic iirms who can choose either project G or project B and a proportion 1 - f are non-strategic iirms who always choose project B. Project G pays G if successful and zero if not successful and has a probability of success we. Project B pays B if successful and zero if not successful and has a probability 01 success 3 Suppose that parameters are such that are : %,G : %:WB : ,B : 2,f : % and the riskless rate of interest is zero and investors in the bond market are risk neutral and cannot distinguish between strategic and non-strategic firms. In a one period model what is the critical level of interest rates above which strategic en- trepreneurs will choose to invest in the bad project? A. % B. % C. % D. g E. None clA-D

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