2. Ainu and Beatriu are savers who each have $100 to lend to Somerset Corp. Ainu and...
Fantastic news! We've Found the answer you've been seeking!
Question:
2. Ainu and Beatriu are savers who each have $100 to lend to Somerset Corp. Ainu and Beatriu, however, can determine Somerset’s project only by doing research. The cost of research is $6, and lenders cannot cooperate to share the cost of research. Ainu and Beatriu know that half of firms have the safe project and half the risky (inefficient) project. A safe project is risk free and costs $200 and is guaranteed to deliver $220. The full surplus from the project accrues to the lenders. The risk-free rate is 3 percent. Assume that everyone is risk neutral and that each saver can observe how the other lends.
- How much is an individual saver’s expected payoff, net of research costs, from doing research?
- What’s the maximum that an individual is willing to spend on research?
- In equilibrium, who, if anyone, does research? Explain. How much is the expected value of the equilibrium deadweight loss?
- Suppose that instead of lending directly to Somerset, Beatriu and Ainu deposit their funds in a commercial bank, which pays them the cost of funds. How much is the commercial bank’s willingness-to-pay for research? Explain why the WTP differs from the answer in part b).
- Assume now that each saver can NOT observe how the other lends. Find the range of feasible prices for (post-research) information.
Related Book For
Posted Date: