Instructions: Read the following scenario below and offer a comprehensive solution to each problem. Also write a solution and which you do the following for each case:

Analyze the key economic issues in the case.

Recommend three different business solutions to the case using managerial economic models and methods.

Justify the role of managerial economics by identifying the metrics you would use to assess the success of your decisions.

Scenario:

Banks are often functionally organize, with a deposit division responsible for gathering deposits, an a loan division responsible for making loans. Banks make money by borrowing short (from depositors) lending long (to home homeowners). If the short-term rates they pay to epositors are lower than long-term rates they earn from mortgage loans, the banks make money.

In fact, banks often fin that they can increase profit by reducing the maturity of deposits (short-term deposits pay lower rates) an by increasing the maturity of loans (longer-term loans earn higher rates).

However, increasing the maturity on loans an reducing the maturity on deposits also increase interest-rate risk: when interest rates rise (as they did in the early 1980s) bank borrowing costs increase dramatically as depositors demand higher rates. Unfortunately, revenue from loan payments does not increase at the same rate because the rates are locked in loans of longer maturities. In fact, interest-rate risk is closely related to the difference in maturities between deposits and loans. A regional bank recently discovered that it was exposed to a particularly high level of interest-rate risk.