In this problem, the lender faces two borrower types: safe and risky. Both types would like to borrow $400 in order to pursue their desired activity. Safe borrowers always earn $500 revenue; risky borrowers earn $700 revenue 50% of the time, and $0 revenue 50% of the time. When risky borrowers earn $0 revenue they don't have to repay back the loan (nor the interest). For your convenience, we have written out the expected income functions for safe and for risky borrowers: - Expected income function for safe borrower: E(y5) = 500 - (1+i)400 = 100 - 400i - Expected income function for risky borrower: E(yr) = 0.5[700 - (1+i)400] + 0.5[0] = 150 - 200i