Question: A bank can make one of two types of loans
A bank can make one of two types of loans. It can loan money to local firms, and have a 75% probability of earning $ 100 million and a 25% probability of earning $ 80 million. Alternatively, it can loan money to oil speculators, and have a 25% probability of earning $ 400 million and a 75% probability of losing $ 160 million (due to loan defaults by the speculators). Sarah, the manager of the bank, makes the lending decisions, and receives 1% of the bank’s earnings. She believes that if the bank loses money, she can walk away from her job without repercussions, although she will not receive any compensation. Sarah and the bank’s shareholders are risk neutral. How does Sarah invest the bank’s money if all she cares about is maximizing her personal expected earnings? How would the stockholders prefer that Sarah invest the bank’s money?
Answer to relevant QuestionsTraditionally, doctors have been paid on a fee-for-service basis. Now doctors are increasingly paid on a capitated basis (they get paid for treating a patient for a year, regardless of how much treatment is required), though ...Suppose that an author of popular science fiction novels is paid a royalty of a share of the revenue from sales, where the revenue is R = pq, p is the competitive market price for such novels, and q is the number of copies ...When rental cars are sold on the used car market, they are sold for lower prices than cars of the same model and year that were owned by individual owners. Does this price difference reflect adverse selection or moral ...A monopoly drug company produces a lifesaving medicine at a constant cost of $ 10 per dose. The demand for this medicine is perfectly inelastic at prices less than or equal to the $ 100 ( per day) income of the 100 patients ...Suppose that the inverse demand curve for paper is p = 200 – Q, the private marginal cost (unregulated competitive market supply) is MCp = 80 + Q, and the marginal external harm from emissions is MCx = Q. Determine the ...
Post your question