Problem 2: Adverse Selection & Moral Hazard Ed is a moneylender who lives in the village of Chibuto in Mozambique. Half ofthe farmers in Chibuto are SAFE farmers and the other half are RISKY farmers. Both types of farmers need a loan of $150 in order to farm. Farmers will take a loan as long as they can earn at least zero expected income. SAFE farmers have a good harvest in which they earn revenues of $300 with 100% probability. They never have a bad harvest. RISKY farmers have a good harvest in which they earn revenues of $450 with 50% probability. They have a bad harvest in which they earn revenues of SO with 50% probability. Ed has perfect information about the farmers, i.e. he knows who is a SAFE farmer and who is RISKY. Ed's opportunity cost is money is 10%. The farmers must repay the full loan plus interest if harvest is good, but nothing if harvest is bad. (a) Let y's and YR denote the incomes of SAFE and RISKY farmers, respectively and Te and R denote Ed's profits from loans to SAFE and RISKY farmers, respectively. Derive the expressions for E ys) and E(VR), the expected SAFE and RISKY, respectively, as functions of the interest rate, i. graph over the range= 0 to -3). Label this "Figure 3" armerS (b) Graph E(Ts), E(nr) , EU's) and E(Vr) as functions of the interest rate,(i.e., put on the horizontal axis and (c) Using your equations and graph, answer the following questions