In an economy, there are two types of firms: 50% of firms are risky (type A) and 50% are safe (type S). Each firm, to start the operation, needs to make an investment of 10 currency units with its own resources and borrow 10 currency units from a competitive and risk-neutral bank (with zero expected profit). Firms know their own type. Once operating, a risky firm has a 20% probability of success, in which case it has an output of 120 currency units. With 80% probability, a risky firm fails and has zero output. A secure firm, on the other hand, is 80% successful, in which case it produces 30 currency units. With a 20% probability, a safe firm fails and has a profit of zero. After production is carried out, a firm only pays the bank if it is successful. The bank charges a payment conditional on its success, in an expected value of 10 (note that as there is only payment in case of success, the payment in this contingency must be greater than 10). The profit of a firm, in case of success, is the value of its production, minus the 10 monetary units anticipated in the first period, minus the amount paid to the bank. So, for example, a successful risky firm has a profit of 110-P, with P being the amount paid to the bank. Upon failure, both types of firms have a profit of -10 (corresponding to the investment loss in the first period). Both firms are risk neutral, which implies that, ex-ante, they make their decisions in a way that maximizes the expected profit. (a) What is the expected output of each type of firm? (Hint: you will see that both types will have the same expected production) (b) Suppose the bank observes the type of firm. Show that the bank will charge 12.5 currency units of type S firms on success. (c) Still assuming that the bank observes the type of firm, what will be the amount charged for type A in case of success. (d) What will be the expected profit of a firm of type S if the bank covers the amount of 12.5 in case of success, as in item (b).