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Suppose the government of the economy in exercise 8 is considering subsidizing credit. Assume that this government works as a social planner, striving to maximize the sum of the utilities of all individuals, net of the cost of subsidies and subject to the bank's break-even constraint. Assuming that the bank charges all borrowers the same interest rate and all loans are therefore equally subsidized, would the government decide to subsidize lending? Calculate the utility of each of the individuals and the social welfare, then compare them with the situation without subsidies in Is subsidization Pareto optimal?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M92757968

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