Suppose that the entrepreneur can choose to use the loaned money for its own consumption, instead of investing in the firm. If they do that, the startup will fail for sure, and the entrepreneur's final wealth is W0 +L. Assume that the bank cannot observe whether the money was used appropriately or not, and thus cannot get the money back if the entrepreneur did not invest it in the startup. They only get some payment back if the entrepreneur takes the loan, invests the money, and the startup ends up being successful. The probability of success in case of investment is 2/3.Q.1 The bank can choose to offer loans or not. If offered, the loans have L = 2 and R = 3. The entrepreneur then decides whether to take up the loan, and if so, whether to invest the money or use it for personal consumption. What happens in this market?

(a) The entrepreneur will take up the loan, and not invest.

(b) The bank does not offer a loan because of a moral hazard issue.

(c) The bank is indifferent between offering the loan or not.

(d) The entrepreneur will take up the loan, and invest.

(e) The bank does not offer a loan because of an adverse selection issue.