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It's about Moral Hazard. Suppose that we have a firm who has a risk project S...

It's about Moral Hazard.

Suppose that we have a firm who has a risk project S with a loan rate at 5%(in class, it was assumed to be zero) and that the firm will default if its project fails. Also assume that Loan amount is given at a size of L. (1)Now compute the value of S in this case with success probability is given p= 1-(S/2). (2)Then compute the new S if the firm has to pay all loan principle even after the project fails. (3)Lastly state how your answer will change if the loan rate becomes higher in both Moral Hazard case and another case without it

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Answer #1

The answer of this peoblem has been given by step by step analysis. Probably part # of the question is incomplete, so, i havent attempted it.

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