Ram has decided to retire. Ali is a lender from a neighboring village who decides to offer loans in Bagli. However, since he is from a different village, he does not know the farmers in Bagli. He only knows that 60% of the farmers are SAFE and 40% are RISKY. As a result, he has to charge a single interest rate to everybody who wants a loan. Like Ram, Ali is a monopolist and his opportunity cost is also 25%. All settings in Problem 1 still apply except for the information setting.

(b)What is the maximum interest rate Ali can charge so that both types of farmers would want to borrow?

(d)Explain what will happen if Ali increases the interest rate above the interest rate you identified in (b)?