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Suppose you are the CFO of a bank. Customers' deposits, on which you pay an interest rate of 5%, account for 90% of you loanable funds, and the rest 10% of the funds come from the federal funds market, where you can borrow funds at 8%. All banks, including yours, are currently charging an interest rate of 8% on their loans. To increase your bank's market share and profit, you decide to lower the interest on your loans to 7.5%. Since in the current economic situation it is hard to get more deposits, you can only obtain additional funds from the federal funds market. Assume that costs other than the cost of funds are insignificant and can be ignored.

a. What is the bank's current average cost of a dollar in loans?

b. What is the bank's current marginal cost of a dollar in loans?

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Business Economics, Economics

Category:- Business Economics
Reference No.:- M91423105

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