In a model economy, entrepreneurs can be either talented and untalented. Each entrepreneur might create an startup with an investment of 50 thousand dollars. Talented entrepreneurs have a 80% chance of succeeding, while that probability is only 40% for the untalented. Success means the startup is sold to a big company for 100 thousand dollars. Failure means the startup has no value.

No entrepreneur has any money; they must get the 50 thousand dollars from a bank. If the startup is successful, which is public information, the entrepreneur pays back 50(1+r) thousand dollars to the bank, where r?0 is the interest rate. Note that the interest rate can potentially be more than 1 (that is, more than 100%). If the startup fails, the bank gets nothing back, meaning they incur a loss of -50 thousand.

All agents are risk neutral.

Question 29: Assume that the type of entrepreneur is an intrinsic, immutable characteristic. Consider the following statements:

1. If banks can observe entrepreneur types, they would be willing to lend to the talented entrepreneurs, as long as r?25%
2. A benevolent dictator with perfect information would optimally allocate loans to both talented and untalented entrepreneurs, since both investments have positive expected profits.
3. Entrepreneurs are always willing to take up loans if the bank offers them, regardless of the interest rate r.

LONG QUESTION 2: In a model economy, entrepreneurs can be either talented and untalented. Each entrepreneur might create a startup with an investment of 50 thousand dollars. Talented entrepreneurs have a 80%% chance of succeeding, while that probability is only 40% for the untalented. Success means the startup is sold to a big company for 100 thousand dollars. Failure means the startup has no value. No entrepreneur has any money; they must get the 50 thousand dollars from a bank. If the startup is successful, which is public information, the entrepreneur ways back 5(1(1 + r) thousand dollars to the bank, wherer 2 0 is the interest rate. Note that the interest rate can potentially be more than 1 (that is, more than 100%). If the startup fails, the bank gets nothing back, meaning they incur a loss of -50 thousand. All agents are risk neutral. Question 29: Assume that the type of entrepreneur is an intrinsic, immutable characteristic. Consider the following statements: I. If banks can observe entrepreneur types, they would be willing to lend to the talented entrepreneurs, as long asr 2 25%% Il. A benevolent dictator with perfect information would optimally allocate loans to both talented and untalented entrepreneurs, since both investments have positive expected profits. Ill. Entrepreneurs are always willing to take up loans if the bank offers them, regardless of the interest rate r. O Only I is correct. O More than one statement is correct. O No statement is correct. Only ll is correct. O Only Ill is correct. Question 30 1 pts Continue assuming that the type of entrepreneur is an intrinsic characteristic. In addition, assume that banks cannot observe entrepreneur types. Suppose that 10%% of entrepreneurs are talented, and the rest are untalented. What is the smallest interest rate r that is consistent with an equilibrium with lending? 0 100% O Anyr>0 works. O Them is no equilibrium with lending Question 31 1 pts Now assume that all entrepreneurs start untalented. But after they take the loan, they might choose to invite a UCLA professor to be a partner. In that case. they become talented, increasing the odds of success. Because the professor has a 15% share in the company, the entrepreneur must pay 15 thousand to them in case of success, in addition to paying back 50(1 + +) to the bank. That is, they only keep 100 - 15 - 50(1 + r) = 35 - 50r in case of success. In case of failure, the professor gets nothing and final wealth for the entrepreneur is still zero. Which of the following values of interest rate r is consistent with an equilibrium with lending? O There is no equilibrium with lending regardless of r. O 20% 0 75X