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| A bank has $5 million in capital that it can invest at a 5 percent annual interest rate. A group of 50 workers comes to the bank wishing to borrow the $5 million. Each worker in the group has an outside job available to him or her paying $50,000 per year. If the group of workers borrows the $5 million from the bank, however, they can set up a business (in place of working their outside jobs) that returns $3 million in addition to maintaining the original investment. (a) If the bank has all of the bargaining power (that is, the bank can make a take-it or leave-it offer), what annual interest rate will be associated with the repayment of the loan? What will be each worker’s income for the year? (b) If the workers have all of the bargaining power (that is, the workers can make a take-it or leave-it offer), what annual interest rate will be associated with the repayment of the loan? What will be each worker’s income for the year? |
