Scientist take two inventions to bank. Invention A and Invention B. They require same amount for loan. It is expected that either one of these inventions will take 1 year to make and will yield reward Ra or 0 for invention A or Rb or 0 for invention b. Probabilities of success are given by: prob(Ra)=Pa prob(Rb)=Pb Bank knows these probabilities. Lords bank has decided to lend only if the expected repayment at the end of the year generates a yield of i. If invention gives 0 reward, Lords bank will not receive any repayment a) Lets assume that lords bank has a risk neutrality on their end, explain why repayments when invention A is successful is given by (1+i)L/pa B) If Lords bank grants loan for invention A, show that the expected payoff for the scientist after repayment is given by paRa-(1+i)L C) what conditions would make the scientist submit Invention A instead of B D) Lords bank grants loan for invention A but doesnt monitor scientist for

updates. What is the payoff to Lords bank if scientist is successful? Under what conditions will the Lords Bank endure Moral hazards for instance the scientist choosing invention B now instead of Invention A