Explain the following simple algebra of moral hazard. Suppose a real estate deal, which requires 100 million as investment today will yield 120 million with probability of 10 percent and will lose 20 million with probability of 90 percent. Suppose that the interest rate is 5 percent per annum.
(a) Without government intervention, would anyone invest in this deal?
(b) Suppose that now the deal is backed by full government guarantee. What will be the outcome? Does your answer depend on the attitude of the investor toward risk?
(c) Suppose that now government guarantying only 80 percent of the initial investment. What will be the outcome? Does your answer depend on the attitude of the investor toward risk?

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The Answer of Explain the following simple algebra of moral hazard. Suppose a real estate deal, which requires 100 million as investment today will yield 120 million with probability of 10 percent and will lose 20 million with probability of 90 percent. Suppose that the interest rate is 5 percent per annum.
(a) Without government intervention, would anyone invest in this deal?
(b) Suppose that now the deal is backed by full government guarantee. What will be the outcome? Does your answer depend on the attitude of the investor toward risk?
(c) Suppose that now government guarantying only 80 percent of the initial investment. What will be the outcome? Does your answer depend on the attitude of the investor toward risk?

Explain the Following Simple Algebra of Moral Hazard