In a given year, Aleem receives 100 loan applications for 200 Nairu each. He spends a total of 2 working days and 10 Nairu obtaining information about an applicant for each loan. He expects to lend to 50% of those farmers who apply for a loan. Aleem also runs a store where he can earn 20 Nairu per day when open. He incurs 8000 Nairu per year in overheads. Aleem obtains funds at a cost of 10% and faces no bad debt or late repayment problems.

Assume that Aleem's marginal costs do not vary with the amount he lends. The demand for loans from Aleem depends negatively on the interest rate that he charges and positively on the interest rates charged by other moneylenders.

Q1.What is the screening cost (in nairu) of each loan made by Aleem?

Q2.What is the expected marginal cost to Aleem of making an additional loan, as a percentage of the loan size ?

Q3.Attribute the share of the fixed costs used in each activity by using the fraction of available time allocated to that activity. What is the the average fixed cost associated with Aleem's lending activities as a % of the loan size?

Q4.What interest rate should Aleem optimally be charging if the credit market is in a long--run monopolistically competitive equilibrium with free entry ?

Q5.Ifa development bank were to provide low interest funds to all lenders in this market, the long-run interest rate faced by borrowers

a. would rise, as the moneylenders would takes this opportunity to increase their economic profits.

b. would fall, as the reduced costs of lending would be passed on to the borrowers.

c. could rise or fall, depending on effect of the entry of new borrowers on average fixed costs.

d. would remain unchanged, as the lender's screening costs would not vary.