Consider an economy where there are three types of agents. Each type wishes to borrow $250,000 for their small business from your bank. The first type of borrower is a high-quality borrower (low risk). This type of borrower will pay off the loan 95% of the time and default on the loan the other 5% of the time. The interest rate for the high-quality borrower is 10%. The second type of borrower is an average-quality borrower (average risk). This type of borrower will pay off the loan 85% of the time and default on the loan the other 15% of the time. The interest rate for the average-quality borrower is 25%. The third type of borrower is a low-quality borrower (high risk). This type of borrower will pay off the loan 75% of the time and default on the loan the other 25% of the time. The interest rate for the low-quality borrower is 50%. The distribution of borrower types in our economy is as follows: 60% are high-quality borrowers, 30% are average-quality borrowers, and 10% are low quality borrowers.

1. Calculate the expected revenue for each type of borrower assuming the bank can correctly identify type.

2. Calculate the expected NET revenue for each type of borrower assuming the bank can correctly identify type.

3. Calculate the expected interest for each type of borrower assuming the bank can correctly identify type.

4. Calculate the expected NET earnings for the bank (across all types) assuming the bank can correctly identify type (Separating Equilibrium).

5. Calculate the expected interest rate for the bank (across all types) assuming the bank can correctly identify type (Separating Equilibrium).

Answer rating: 100% (QA)

1 The expected revenue for each type of borrower is Highquality borrower 06 x 250000 x 1... View the full answer