help Q3

3. An entrepreneur has two projects to choose between. Both require an investment of $1 which must be borrowed. The projects produce gross returns in one year as follows.: Risky Safe 0 0 Project payoff if failure ($) payoff if success ($) probability of success 10 6 2/10 6/10 I Suppose there are 100 such entrepreneurs.. A bank cannot observe the project choice of an entrepreneur. Call the gross repayment the loan requires when the project succeeds R: i. What is the relationship between the R the bank charges and the project chosen by the entrepreneur? Explain in detail ii. Over what ranges of R will the safe and risky projects, respectively, be chosen? What is the maximum R banks can charge consistent with the entrepreneur choosing the safe project? Explain. iii. What R will banks charge and why? 3. An entrepreneur has two projects to choose between. Both require an investment of $1 which must be borrowed. The projects produce gross returns in one year as follows.: Risky Safe 0 0 Project payoff if failure ($) payoff if success ($) probability of success 10 6 2/10 6/10 I Suppose there are 100 such entrepreneurs.. A bank cannot observe the project choice of an entrepreneur. Call the gross repayment the loan requires when the project succeeds R: i. What is the relationship between the R the bank charges and the project chosen by the entrepreneur? Explain in detail ii. Over what ranges of R will the safe and risky projects, respectively, be chosen? What is the maximum R banks can charge consistent with the entrepreneur choosing the safe project? Explain. iii. What R will banks charge and why