The population of Community A includes three kinds of households. The following table describes numbers of households in each group, the income they obtain each period from sources other than business investment, and their business skill level.

Group	Number of households	Income from other sources in each period	Business skill level
Group 1	40	30	Low
Group 2	40	30	High
Group 3	20	80	High

Two types of business investment opportunities are available in Community A: small retail businesses and small sewing businesses. The returns to investments in setting up these businesses do not depend on how many people choose to undertake them. The following table describes the structure of their setup costs and the profits they generate in each of three periods, for potential entrepreneurs that have low and high business skill.

Project Description		Setup cost	Profits delivered by business in each of three periods
			Period 1	Period 2	Period 3
Purchase inventory for small retail operation	Low skill	50	25	25	0
	High skill	50	40	40	0
Purchase sewing machine for tailoring business	Low skill	70	0	0	0
	High skill	70	0	60	60

Households have two sources of financing to cover the setup cost of an investment: a loan from the local microcredit program (taken out at time zero, before the beginning of period) and saving out of Period 1 income from other sources. Initially, the local microcredit program offers loans of 50, which borrowers must pay back in two installments of 30 each in Periods 1 and 2. This means that borrowers can finance immediate investment in a small retail business, but can finance investment in a sewing business only by adding 20 saved out of other income in period 1 to the loan of 50. Borrowers consider an investment feasible only if it does not require them to push consumption below 30 in any period. As long as consumption remains above 30 in all periods, the utility a household derives over the three-period horizon is given by the simple sum of consumption in periods 1, 2 and 3. Consumption in any period is equal to income from other sources minus any saving out of income used to help finance investment plus any business profits derived from an investment minus any loan repayments. Households seek to maximize utility as they decide whether to borrow and invest, and which investment project to undertake.

a. For each group (1, 2 and 3) state which business investment, if any, they will undertake at time zero, given the conditions described thus far, and indicate what level of consumption they will enjoy in each period.

b. State what percentage of Community A households participates in the microcredit program and fill in the following table describing the microcredit programs impacts. The impact on consumption in any period is consumption in the presence of any microcredit financed investment minus consumption in the absence of any such investment. If they do not participate, then the impact in each period is zero.

Impact on average consumption for:	Participate (yes or no)	Period 1	Period 2	Period 3
Group 1
Group 2
Group 3
Microcredit program Participants
Percent of microcredit program participants whose consumption is raised by at least 15 in the given period

c. Suppose evaluators are able to perfectly estimate the impact of the program on consumption in any period and for any group. Discuss how their conclusions regarding the programs success in raising consumption might differ depending on the period in which they observe consumption.

d. Focus only on period 2. If evaluators consider a program successful if it raises average consumption among participants by at least 15 in period 2, would they judge this program successful? If they consider a program successful if it raises the consumption of at least half the participants by 15 and reduces consumption for no participants in period 2, would they judge this program successful?

e. Suppose the interest rate rises so that microcredit program participants must make payments of 35 rather than 30 in periods 1 and 2. Now who participates and which projects do they undertake?

f. Suppose the microcredit program is restructured to give borrowers a grace period before beginning to repay their loan. They still obtain loans of size 50, and now must pay off the loan in two installments of 40 each in periods 2 and 3. No payment is required in period 1. How does this change affect the investment choices of Group 2 households?