9 Consider a variant of the oligopolistic version of the Monti-Klein model discussed in lecture.There are N21 banks competing in the market for loans. Banks face a fixed entry costC> 0 and fund loans using deposits. Deposit supply is perfectly elastic and FD > 0denotes the interest rate on deposits. There is no interbank market so that each bank'sloan supply equals its deposit base: i.e. L = D; for all i E N.Let TL(L) denote the (inverse) loan demand function, given by:TL(L) = a-bLwhere L = CiEN Li denotes the aggregate supply of loans. In what follows, assume that:a > FD and b< (a-FD)²/C.1. Write down bank i's profit function II(L) and differentiate the bank's profit functionwith respect to Li.2. Derive the (symmetric) profit-maximizing loan supply (so that L = L* for all i).3. Calculate the bank's profits at the profit-maximizing loan supply: II(L*).4. Assume that there is free entry into the banking sector so that banks make zeroprofits in equilibrium. Calculate the equilibrium number of banks N*.

Loan Demand function : r (L) = a - b*L Fixed Cost of entering the market = C Number of banks = N…

Consider a variant of the oligopolistic version of the Monti-Klein model discussed in lecture. There are N21 banks competing in the market for loans. Banks face a fixed entry cost C> 0 and fund loans using deposits. Deposit supply is perfectly elastic and FD > 0 denotes the interest rate on deposits. There is no interbank market so that each bank's loan supply equals its deposit base: i.e. L = D for all i E N. Let TL(L) denote the (inverse) loan demand function, given by: TL(L) = a-bL where Le Li denotes the aggregate supply of loans. In what follows, assume that:

Consider a variant of the oligopolistic version of the Monti-Klein model discussed in lecture. There are N21 banks competing in the market for loans. Banks face a fixed entry cost C> 0 and fund loans using deposits. Deposit supply is perfectly elastic and FD > 0 denotes the interest rate on deposits. There is no interbank market so that each bank's loan supply equals its deposit base: i.e. L = D for all i E N. Let TL(L) denote the (inverse) loan demand function, given by: TL(L) = a-bL where Le Li denotes the aggregate supply of loans. In what follows, assume that:

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter15: Contracting, Governance, And Organizational Form

Section: Chapter Questions

Problem 1.3CE

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