**VARIANCE PROBLEM**

Hi,

I am confused with how you solve this problem

Please give me the formula as well as how to solve it step by step (it is also okay to upload handwriting) **About how you get the answer

Q: Assume we have 100 households and 100 corporations, each household has 90 USD for investment and each corporations needs 90 USD for production

*.Earnings are identical independent distributed E1~N(100,25)

*Supervision Cost (SC) per contract with a firm equal 5 USD

Compare the three alternatives with respect to their effect on total earnings variance (1) and total supervision cost (2) for the households if:

a) each households invests in one firm

b) each household splits money equally among all firms

c)Bank for intermediation

Answer:

1) Total earnings variance for household:

a) Var (E) = 25

b) Var (E) = 1/4

c) Var (E) = 1/4

2) Total Supervision costs for the household:

a) SC= 5

b) SC = 500

c) SC = 1/100 * 500