Question 10 [all parts except {iv} one mark) A. creditor has lent L to a developing oountry, which subsequently defaults and enters negotiations with the creditor. [H U il [iii] [W] M M] {vii} [viii] lixl Suppose a debtor puts in effort e between (1% and 1m and that e is the probability diat a loan L can be repaid with produced output and that otherwise output is 1ero. What is the expected output produced by effort i suppose a creditor can choose to only receive Kai and leave LR with the debtor. gadglsp assume effort oosl: by the debtor is 2e3. What is he expected payoff for the debtor? If the creditor adopts this forgiveness policy, what is their expected payoff? What is the optimal effort for die debtor if the creditor forgives by ML? {2 marks; one derivative and one for solving} What is e as a function of R called? Plot the relationship between e and R. How much should a selfinterested creditor forgive? Of what signicance is the downward sloping relationship between e and R? Why is this model [due to Enigma n] important for international debt forgiveness? What is the difference between moral hazard and adverse selection? Which ofthese is of oonoern here? What remedy might there be for this