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Suppose that the demand for loans depends on the annual interest rate charged (i r ), the annual fee charged (F), and the unemployment rate.

Suppose that the demand for loans depends on the annual interest rate charged (ir), the annual fee charged (F), and the unemployment rate. Each loan is a $100,000, 30 year fixed APR mortgage. Assume that the unemployment rate is 5% (U).

Q = 125 624ir + 0.26F 90.4U

The bank has a monthly fixed cost of $10,000 plus an annual variable cost (interest paid on deposits plus various administrative expenses equal to 5% of the loans created)

Produce a Cost Function.

What is the Banks Annual Profits from this portfolio (limited to the information you are provided).

What is the Interest Elasticity of Demand for Loans?

What is the Unemployment Elasticity of Demand for Loans?

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