(Question 1 and its answer is attached in the pictures)

Solve this question plz

((Return to the problem of financing investment from question 1. But instead of projects being either Good or Bad, suppose now that all projects, which still require an investment of $100, are Good with a monetary payoff of $110. The entrepreneurs, on the other hand, are now all Bad: after the bank has lent the money for a project, the entrepreneur can divert $20 out of the project's payoffs towards her own consumption (that money can therefore not be used to repay the loan). Even though banks can foresee such entrepreneurial theft, they cannot prove it after the fact.

a) Suppose that the entrepreneurs have no money of their own. Will a bank and an entrepreneur be able to agree on a loan contract so that investment is undertaken? Is this outcome efficient? Explain your answer carefully.

b) Suppose instead that each entrepreneur has some wealth of her own. Would a loan agreement become feasible if the entrepreneur financed part of the investment herself? If so, how large would the entrepreneur's investment have to be? Explain your answer carefully.))

l. {311 points] |IConsider the following model of investment and nancing. Investinent projects are discovered by entrepreneurs. Each project requires an investment of $1111]. Since the entrepreneurs do not have enough money themselves, if a project is to be Undertaken a bank must provide a loan of $1111]. "There are two types of investment projects. Good projects that generate a monetary payoff of $1 111 and Bad pmjects that generate a monetary payoff of $61} plus a private entrepreneurial benefit {in the form of utility rather than cash] of $25. Everyone knows that there is the same number of Good and Bad projects. However, before a project is undertaken the bank knows nothing about the payoff from each individual project. The entrepreneurs, on the other hand, know whether their own project is lGood or Bad. Banks can get pePayment of a loan only out of the monetary payoff generated by the project that the loan finances {i.e.,r the entrepreneUrs enjoy limited liability} and only up to the amount of the loan [i.e., $11.11)]. Hot banks can charge compensation for their lending service in the form of a non-remdable, up-front payment from the entrepreneur when the loan contract is signed. Competitive pressure forces each bank's expected prot from its lending activity to be equal to zero. a) Suppose that a random entrepreneur walks into a bank to borrow $11111 for her project. What is the bank's expected repayment ot'the loan? Remember that the repayment can come only not of the monetary payoff from each project. b} Since all entrepreneurs are identical in the eyes of the bank, they must all pay the same lump-sum payment when the loan contract is signed. Given your answer in part a) along with the fact that the bank must make zero expected profit. how large must this lump-sum payment be? c) Given the answer in part b]. which entrepreneurs will accept the loan contract? Explain your answer carefully. d} Giv- your answer in part c]1 will the bank alter its oontract offer? If so1 how? Which projects will be undertaken? Explain your answer carefully. e) Is the outcome described in part d} efficient? Why or why not? Explain your answer carefully. a) Bank can take maximum of $100 which is the loan amount. Now there is 50% change that they will be able to recover $60 from bad loans and $100 from good loans. So, expected repayment amount = 50%*100 +50%*60 = $80. b) The bank is giving loan of $100 and expected repayment amount is $80, so if bank wants to go for breakeven then they need to cover this gap of $20 by taking $20 as lump-sum payment. c) When bank is taking $20 as lump-sum payment then good projects are paying loan of $100 and lump- sum payment amount of $20, so total cost to them is $120, while the gains is $110. So, they will not take loan under this contract. Bad projects are paying loan of $60 and lump-sum payment amount of $20, so total cost to them is $80, while the gains from the loan is $60+$25 i.e. $85. So, they will take loan under this contract. d) The bank can alter the contract by taking lumpsum amount of $30 and paying back $21 when the customer pays the complete amount or else the complete amount is kept with bank. So, good projects will pay loan of $100 and lump-sum payment amount of $30, so total cost to them is $130 but they will get $21 back. Therefore, the effective cost is $109, while the gains is $110. So, they will take loan under this contract. Bad projects are paying loan of $60 and lump-sum payment amount of $30, so total cost to them is $90, while the gains from the loan is $60+$25 i.e. $85. So, they will not take loan under this contract