Question

1. Consider a bank that would like to offer loans in a vliiage. The bank has access to money at a national interest rate of r= 5% Assume the fraction of credit-worthy people in the village is p, and the fraction of noncredit worthy people is (1-p0 The bank cannot distinguish between these two types. Suppose each member of the village would like a loan of $1.

a) What interest rate, i must the bank charge to break even (leave your answer in terms of P)?

b) Suppose there is a moneylender in the village who offers loans at an interest rate of 50%. This means that the bank cannot charge a higher interest rate than 50%. For what values of p will the bank decided to quit offering loans to the village?

c Consider an alternative scenario. Suppose even the non-creditworthy people are not entirely non creditworthy. In other words they are able to repay the principle of $1 but not the interest in that case what interest rate would the bank charge to break even ( leave your answer in terms of p)?

Answer 1

To answer this question let us first understand the Sherman Act Section 2. Section 2 of the Sherman Act makes it unlawful for any person to "monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations.

Section 2 establishes three offenses, commonly termed "monopolization," "attempted monopolization," and "conspiracy to monopolize." Although this report and most of the legal and economic debate focus specifically on the two forms of monopolization--monopoly acquisition and monopoly maintenance much of the discussion applies to the attempt offense as well.

The definition of market states that it is a place that facilitates the exchange of goods and services between two individuals, the definition basically states that market is a place where perfect competition exists and one buyer or seller cannot influence the overall market, in short it’s a price taker and not price maker. Thus section 2 of the Sherman Act deals with monopolization and monopoly disrupts the entire market system, thus affecting the essence of market which is perfect competition.

Monopoly if it exists on the basis of innovation and copyright it should not be considered as illegal but if it is acquired by some fraudulent and illegal means it disrupts the entire market, therefore as the section 2 of Sherman act specifies monopolization should be dealt with strictly and should not be allowed to disrupt the perfectly competitive market.