Consider a typical village money lender in a loan market where competition among

Question

Consider a typical village money lender in a loan market where competition among money lenders drives the rural rate of interest to a point where each lender on average earns zero expected profits (over and above the opportunity cost of funds to lenders). Suppose the typical moneylender has 200,000 yuan to lend out to farmers in the village and the opportunity cost of his funds (what the lender can get if he puts his funds in the bank) is 15% per annum. A) Suppose there is no risk of borrowers defaulting on their loan (i.e. the probability of repayment, p=1), what will be the prevailing interest rate that will be charged to farmers in the village? (hint: calculate the moneylender

Explanation / Answer

With zero chance of default, and zero expected economic profit, the accounting profit = opportunity cost, which is 15% So the prevailing interest rate will be 15%

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---