There are two types of borrowers a and b they each need a

Question

1. An entrepreneur needs a $500 loan to invest in a risky project. The project will produce revenue of $750 with probability 0.9 and revenue of $0 otherwise. If the bank offers a loan to this entrepreneur, then the lowest interest rate the bank can afford to offer is what?

• 4.5%
• 8.5%
• 12%
• 18%

2. There are two types of borrowers, A and B. They each need a $10 loan but the bank cannot observe type. Type A always repays her loan but Type B only repays his loan with probability 0.82. If the bank figures that each type is equally likely to apply for a loan, then what is the lowest interest rate the bank can afford to charge?

• 13%
• 10%
• 7%
• 5%