There are two types of projects in the market: A (safer) and B (riskier). At time 1, the payoff of A will be either $500 (probability 0.75) or $300 (probability 0.25). The appropriate discount rate for project A is 12%. The minimum price A can accept is $350. The payoff of B will be either $800 (probability 0.2) or $100 (probability 0.8). The appropriate discount rate for project B is 20%. In this simple economy, there are 90% chance that the project will be A. Evaluate the funding situation, i.e., which type of project will be funded and the price, based on the following scenarios:

Question 1: If a bank can tell whether the entrepreneur is endowed with project A or B, but cannot stop A from switching to B after A has receive the fund. What is the maximum face value of loan that the bank can lend to A without incur any monitoring costs?, i.e., A will not have incentive to switch to B given this incentive compatible amount of loan and limited liability.