A competitive lender makes loans to a pool of borrowers that are identical. After borrowers have received their loans they choose one of two investment projects. Project G pays the borrower a rate of return of r(g) with probability p(g). With probability 1-p(g), the project earns a zero rate of return, the borrower defaults on the loan, and the lender receives back the initial loan amount. Project B pays the borrower a rate of return of r(b) with probability p(b). With probability 1-p(b), the project earns a zero rate of return, the borrower defaults on the loan, and the lender receives back the initial loan amount. We assume that r(g)p(b) and p(g)(1+r(g))>p(b)(1+r(b)).
The lender can’t distinguish between borrower types and so it charges all borrowers the same interest rate r(L). The lender lends an amount L and pays interest r(D)on funds acquired from depositors.
Q1. Which project would the lender prefer that the borrowers undertake?
Project B or Project G
Q2. Explain in words why your answer to the previous question is true.
Q3. Write down an expression for the profit that a borrower expects from Project G and submit an image file depicting your answer.
Q4. Suppose r(g)=0.08, r(b)=0.10, p(g)=0.99, p(b)=0.3, r(D)=0.02, L=100. Find the value for r(L)* such that the borrower is indifferent between projects G and B. Round to three decimal places.
Q5. Either by hand or using a computer, graph the lender’s expected profit function E(π^L) for values of r(L) between 0.00 and 0.10. Make sure axes and r(L)* are clearly labeled.
Q6. Explain in words what is happening to the borrowers’ behavior at the discontinuity in the lender’s profit function that you graphed in the previous question.
It is apparent that the United States has a problem, but what are some solutions to to this crisis? Unfortunately, there is no simple solution to this complex problem, but in order to move forward, we propose several methods that may incite change in the current system in place. Historically, pharmaceutical companies dictate pricing with no restrictions from Medicare, Medicaid, or Federal/State governments. The US government (i.e. Medicare, Medicaid, Tricare, etc.) is the largest buyer of prescription drugs in the world, yet they have no say in the pricing of drugs. Our government also generally issues funds to these pharmaceutical companies for research and development, with substantial investments in the basic science that leads to new drug discoveries. For example, the federal government spent $484 million developing the cancer drug Taxol, which was then taken under agreement with Bristol-Myers Squibb in 1993. In 10 years, the manufacturer earned $9 billion in revenue and paid the federal government $35 million in royalties (article). Although 75% of new innovative drugs are supported by federal funding, most consumers and payers are unable to afford these medications due to the unreasonable prices. (article) We propose for the United States government to have the ability to establish delegated sectors to negotiate drug prices. By giving the government some power in dictating cost, this could substantially lower introductory prices, annual costs, and which may reduce out-of-pocket costs for patients. For example, the government may establish a drug’s ceiling price similar to the Federal Ceiling Price program used by the Department of Veteran Affairs. They may also begin use of reference pricing, thus permitting the Department of Health and Human Services to set a benchmark price for clinically comparable drugs that are interchangeable. Though these changes may produce more cost-effective medication, a drawback may be the lack of market diversity. Rather than having one pharmaceutical company dictating the price, the federal government is dictating the price thus creating a lack of competition. Having one body dictate everything may create tensions between pharmaceutical companies and the government; thus, change might not be made at all. Next, pharmaceutical companies spend a substantial amount of money on marketing rather than research. At this point, we are unaware of the exact cost breakdown of pharmaceutical company revenue. There is no requirement for documentation to show the difference b>GET ANSWER