3. An entrepreneur has two projects to choose between. Both require an investment of $i...
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3. An entrepreneur has two projects to choose between. Both require an investment of $i which must be borrowed. The projects produce gross returns in one year as follows.: Project Risky Safe payoff if failure ($) 0 0 10 payoff if success ($) 6 probability of success 2/10 6/10 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 theentrepreneur? Explain in detail. ii. Over what ranges of R will the safe and risky projects, respectively, be chosen? What is themaximum R banks can charge consistent with the entrepreneur choosing the safe project? Explain. iii. What R will banks charge and why
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