Suppose a firm can approach 20 different savers when seeking to acquire financing for a capital expenditure. It costs the firm 2 units of the consumption good to meet with each potential lender. The capital expenditure project requires 3,000 units of the consumption good to complete. Alternatively, the firm could go a single bank, at the same cost (2 units per loan), to acquire the loan.
a) What size of loan does the firm get from each saver?
(b) Compute the savings to the firm by going to the bank instead of
the individual savers.
(a)
The project requires 3,000 units to complete. Additionally, the firm will be spending 2 units per lender or 40 units for 20 different lenders. So, the total investment required would be 3,040 units distributed among 20 savers. Assuming that each saver provides the same amount, the size of loan that the firm gets from 1 saver is 3040/20 = 152 units
(b)
If the firm chooses to go to the bank, it can get 3,000 units for an additional charge of 2 units. This means the firm ends up saving 38 units.
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