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# Worksheet Name
1 Overview
2 Competitive model
3 Monopolistic model (Revenues)
4 Monopolistic model (Profit)
5 Oligopolistic version
Title
WORKSHEET OVERVIEW: Theory of Banking Firm.xls
Illustrating competitive model
Monopolistic model (loans revenue only model)
Monopolistic model (loans only)
Oligopolistic version
khess WMS 11/02/2021 25891284.xls Overview Page 1
 A B C D E F G H
1 Illustrating competitive model
2 L Loans $ 50.00 π, C
3 gammaL 1000000 1E-06 #VALUE! $8.00 π(L),
4 FC Fixed cost $ 2.00 $6.00
$4.00
5 VC Variable cost $ 0.125 #VALUE!
$2.00
6 C(L) Total cost $ 2.125 #VALUE! $0.00
7 -$2.00 0 20 40 60 80 10
8 dC/dL Marginal cost 0.7500% #VALUE! -$4.00
9 FC/L Average fixed cost 4.0000% #VALUE! -$6.00
-$8.00
10 VC/L Average var. cost 0.2500% #VALUE!
-$10.00
11 C/L Average total cost 4.2500% #VALUE!
12
12%
13 L@Min(C/L) $ 100.00 #VALUE!
14 (C/L)min 3.0% #VALUE!
10%
15
16 T Liquid assets $ 10.00
8%
17 rT 4.00%
18 rL =rT- (C/L)min 7.00% #VALUE!
6%
19
20 Interest income $ 3.90 #VALUE!
4%
21 π(L) Profit $ 1.78 #VALUE!
3%
22
2%
23
24
0%
25
0 20 40 60 80 100 120
26
27
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29 L@Min(C/L) $ 20.00
30 $ 100.00 0 $ 36.00
31 $ 100.00 0.1004 $ 52.00
32 $ 68.00
33 rL-rT $ 84.00
34 0 3.0% 16 $ 100.00
35 $ 100.00 3.0% $ 116.00
36 $ 132.00
37 $ 148.00
38 $ 164.00
39
40
Perfect competition model $ 180.00

41 Numerical example
42
43
 Numerical example to illustrate
44
45 determination of loan rate rL
46  Assumes functional form for cost
47
function of competitive bank
 Given T (liquid assets) and market rate
rT , premium (rL - rT ) equals marginal
loan cost and lowest average loan cost.
  Numerical example to illustrate
determination of loan rate rL
 Assumes functional form for cost
A B C D
48
function of competitive bank E F G H

49  Given T (liquid assets) and market rate

50 rT , premium (rL - rT ) equals marginal
51
52
loan cost and lowest average loan cost.
53
54 22/12/2008 khess, WMS, 14
kurthess@waikato.ac.nz
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56
57
58 Perfect competition model
59
60
Numerical example
61 Cubic cost function with C  L   FC   L L3
62 fixed cost term FC;
63 C  3 L L2
γL is a constant L
64
C FC
65 Average cost per $ of L:    L L2
66
L L
67  C L  FC
Marginal average cost:  2  2 L L
68 L L
69 13
  C L   FC 
70 L at marginal average L @ min     
71
cost = 0:  L   2 L 
72
22/12/2008 khess, WMS, 15
73 kurthess@waikato.ac.nz

74
 I J K L M N
1 Back to Overview
2
0 3 π(L), C(L)
0 4 C(L)
0 π(L
5 )
0
0 6
0 0 20 407 60 80 100 120 140 160 180 200
0 8
0 9
0 L
10
0
11
12
13
14
15
16 dC/dL
17 FC/L
18 VC/L
19 C/L
20 L@Min
(C/L)
21
rL-rT
22
23
24
25
0 40 60 80 100 120 140 160 180 200
26
27 C(L) FC/L VC/L C/L dC/dL π(L)
28 -$ 2.125 0.04 0.0025 0.0425 0.75% $ 1.78
29 -2.008 0.1 0.0004 0.1004 0.0012 -0.208
30 -2.046656 0.055556 0.001296 0.056852 0.003888 0.873344
31 -2.140608 0.038462 0.002704 0.041166 0.008112 1.899392
32 -2.314432 0.029412 0.004624 0.034036 0.013872 2.845568
33 -2.592704 0.02381 0.007056 0.030866 0.021168 3.687296
34 -3 0.02 0.01 0.03 0.03 4.4
35 -3.560896 0.017241 0.013456 0.030697 0.040368 4.959104
36 -4.299968 0.015152 0.017424 0.032576 0.052272 5.340032
37 -5.241792 0.013514 0.021904 0.035418 0.065712 5.518208
38 -6.410944 0.012195 0.026896 0.039091 0.080688 5.469056
39 -7.832 0.011111 0.0324 0.043511 0.0972 5.168
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Monopolistic model (loans revenue only model)
Loan demand curve parameters
Revenue
Intercept rL(L=0) 20.00% $6.00
Slope Ldemand (drL/dL) -0.002 #VALUE! $5.00
dL/drL -500 #VALUE! $4.00
L(rL) Loans $ 20.00 $3.00
rL Loan rate 16.00% $2.00
εL Elasticity 4.00 $1.00
$0.00
Revenue, marginal revenue $0 $10 $20 $30 $40 $50 $60 $70
R(L,rL) Revenue $ 3.20
dR/dL $ 0.120 25%
Max revenue choice of L and rL
20%
LOptimal (L*) $ 50.00
rLOptimal (rL*) 10.00% 15% 2
εL @ L* 1.00 10%
5%
0%
$0 $20 $40 $60 $80
-5%
-10%
-15%
-20%
-25%

Loan demaRevenue MRLoans

16.00% $ 3.20 $ 0.120
$ - 0.2 0 0.2
$ 10.00 0.18 1.8 0.16
$ 20.00 0.16 3.2 0.12
$ 30.00 0.14 4.2 0.08
$ 40.00 0.12 4.8 0.04
$ 50.00 0.1 5 0
$ 60.00 0.08 4.8 -0.04
$ 70.00 0.06 4.2 -0.08
$ 80.00 0.04 3.2 -0.12
$ 90.00 0.02 1.8 -0.16
$ 100.00 0 0 -0.2
 Back to Overview

Revenue

30 $40 $50 $60 $70 $80 $90 $100

Loan demand Elasticity

MRLoans 10.00

L @ Max 9.00
2
revenue 8.00
L volume 7.00
6.00
5.00
$40 $60 $80 $100 $120
4.00 4.00
3.00
2.00
1.00
0.00
$0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100

Elasticity
4.00 L @ Max revenue
#DIV/0! $ 50.00 0 100
9 $ 50.00 0.12 100
4 0
2.333333 L volume 0
1.5 $ 20.00 0 0 0
1 $ 20.00 0.192 4.80 0
0.666667 0
0.428571 Elasticity @ L chosen 0
0.25 0 4.00 0
0.111111 $ 24.00 4.00 0
#DIV/0!
$70 $80 $90 $100
 A B C D E F G
1 Monopolistic model (loans only)
2 Loan demand curve parameters 30%
3 Intercept rL(L=0) 20.00%
4 Slope Ldemand (drL/dL) -0.002 #VALUE! 20%
2
5 dL/drL -500 #VALUE!
6 L(rL) Loans $ 20.00 10%
7 rL Loan rate 16.00% #VALUE!
8 εL Elasticity 4.00 #VALUE! 0%
9 Cost, revenue, profit $0 $20 $40 $60
10 Riskfree rate rT 4.00%
-10%
11 gammaL constant dC/dL 2.00%
12 C(L.D) Mngt cost $ 0.40 #VALUE!
-20%
13 rT*L $ 0.80 #VALUE!
14
-30%
15 R(L,rL) Revenue $ 3.20 #VALUE!
16 Total cost -$ 1.20 #VALUE!
17 Profit π
18 π Profit $ 2.0000 #VALUE!
$3.00
19 dπ/dL marginal π $ 0.060 #VALUE!
$2.00
20 Max profit choice of L and rL
$1.00
21 LOptimal (L*) $ 35.00 #VALUE!
$0.00
22 rLOptimal (rL*) 13.00% #VALUE!
-$1.00 $0 $10 $20 $30 $40 $50 $6
23 εL @ L* Elasticity @L* 1.86 #VALUE!
-$2.00
24 -$3.00
25 -$4.00
26
27
28
29
30 0.130000 Loan demaπ
31 0.13 16.00% $ 2.00
32 $ - 0.2 0
33 $ 10.00 0.18 1.2
34 $ 20.00 0.16 2
35 $ 30.00 0.14 2.4
36 $ 40.00 0.12 2.4
37 $ 50.00 0.1 2
38 $ 60.00 0.08 1.2
39 $ 70.00 0.06 0
40 $ 80.00 0.04 -1.6
41 $ 90.00 0.02 -3.6
42 $ 100.00 0 -6
 H I J K L M N O P
1 Back to Overview
% 2 Loan
3 demand
Elasti
4 Marginal π 10.00
% loans
2 9.00
5 L @ Max
6 profit 8.00
%
7 L volume 7.00
6.00
% 8
5.00
$0 9
$20 $40 $60 $80 $100 $120
4.00 4.00
10
% 3.00
11
2.00
12
% 1.00
13 0.00
14 $0 $10 $20 $30 $40 $
%
15
16
17 Profit π
18
$3.00
19
$2.00
20
$1.00
21
$0.00
$1.00 $0 $10 22$20 $30 $40 $50 $60 $70 $80 $90 $100
23
$2.00
$3.00 24
$4.00 25
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29
30 Marginal π l Elasticity
31 $ 0.060 4.00 L @ Max profit
32 0.14 #DIV/0! $ 35.00 0 100
33 0.1 9 $ 35.00 0.156 100
34 0.06 4 -85.71429
35 0.02 2.333333 L volume 232.6531
36 -0.02 1.5 $ 20.00 0 0 -1063.557
37 -0.06 1 $ 20.00 0.192 4.80 6837.151
38 -0.1 0.666667 -56650.68
39 -0.14 0.428571 Elasticity @ L chosen 574599.8
40 -0.18 0.25 0 4.00 -6895197
41 -0.22 0.111111 $ 24.00 4.00 95547733
42 -0.26 #DIV/0!
 Q R S T U
1
2
3 Elasticity
4
5
6
7
8
9
4.00
10
11
12
13
$10 $2014 $30 $40 $50 $60 $70 $80 $90 $100
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 A B C D E F G
1 Oligopolistic version
2 Const elasticity loan demand curve parameters
25%
3 εL Elasticity 0.40 4 Constant elastic
4 n No of banks 4.00
5 L0 $ 1.00 normalized for curve display 20%
6 delta L $ 0.10 for curve display
7 Riskfree rate 5.00% 15%
8 gammaL constant dC/dL 1.00%
9
10%
10 Max profit choice of L and rL
11 rLOptimal (rL*) 16.00% #VALUE!
12 LOptimal (L*) $ 1.00 #VALUE! 5%
13
14 Revenue, cost, profit 0%
15 Revenue 0.16 #VALUE! $0.50 $0.60 $0.70 $0
16 C(L.D) Mngt cost (0.01) #VALUE!
17 rT*L (0.05) #VALUE! Sin
18 Profit 0.10 #VALUE!
19 $1.00
20 $0.80
21 $0.60
22
$0.40
23
24 $0.20
25 $0.00
26 $0.80 $1.00 $
27
28
29
30
31 L @ rL*
32 $ 1.00 0
33 $ 1.00 0.192
34
35 rL*
36 0 16.00%
37 $ 1.20 16.00%
38
39 rT + gammaL
40 0 6.00%
41 $ 1.32 6.00%
42
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 H I J K L M N O
1 Back to Overview
2
25%
3 Constant elasticity loan demand curve
4
20% 5 2 Elasticity : 0.4
6
No
16%
15% 7
8 banks:
9
10%
10 4
11
6%
5%12
13
1
0%14
15
$0.50 $0.60 $0.70 $0.80 $0.90 $1.00 $1.10 $1.20 $1.30 $1.40
16
17 Single bank profit π
18
$1.00
19
20
$0.80
21
$0.60
22
$0.40
23
$0.20
24
25
$0.00
26$0.80 $1.00 $1.20 $1.40 $1.60 $1.80 $2.00
27
28
29
30 dL $ 0.10
31 L rL π Marginal π loans
32 0 -15 $ - #DIV/0! #DIV/0! #DIV/0!
33 #DIV/0! -14 $ - #DIV/0! #DIV/0! #DIV/0!
34 -13 $ - #DIV/0! #DIV/0! #DIV/0!
35 -12 $ - #DIV/0! #DIV/0! #DIV/0!
36 -11 $ - #DIV/0! #DIV/0! #DIV/0!
37 -10 $ - 541.34% $ - #DIV/0!
38 -9 $ 0.10 208.21% $ 0.20 $ 2.02
39 -8 $ 0.20 115.67% $ 0.22 $ 0.17
40 -7 $ 0.30 75.44% $ 0.21 -$ 0.11
41 -6 $ 0.40 53.88% $ 0.19 -$ 0.17
42 -5 $ 0.50 40.82% $ 0.17 -$ 0.17
43 -4 $ 0.60 32.23% $ 0.16 -$ 0.17
44 -3 $ 0.70 26.23% $ 0.14 -$ 0.16
45 -2 $ 0.80 21.86% $ 0.13 -$ 0.15
46 -1 $ 0.90 18.56% $ 0.11 -$ 0.14
47 0 $ 1.00 16.00% $ 0.10 -$ 0.13
 H I J K L M N O
48 1 $ 1.10 13.44% $ 0.08 -$ 0.18
49 2 $ 1.20 11.49% $ 0.07 -$ 0.16
50 3 $ 1.30 9.95% $ 0.05 -$ 0.14
51 4 $ 1.40 8.73% $ 0.04 -$ 0.13
52 5 $ 1.50 7.73% $ 0.03 -$ 0.12
53 6 $ 1.60 6.91% $ 0.01 -$ 0.11
54 7 $ 1.70 6.22% $ 0.00 -$ 0.11
55 8 $ 1.80 5.63% -$ 0.01 -$ 0.10
56 9 $ 1.90 5.13% -$ 0.02 -$ 0.10
57 10 $ 2.00 4.70% -$ 0.03 -$ 0.10
58 11 $ 2.10 4.32% -$ 0.04 -$ 0.09
59 12 $ 2.20 3.99% -$ 0.04 -$ 0.09
60 13 $ 2.30 3.70% -$ 0.05 -$ 0.09
61 14 $ 2.40 3.45% -$ 0.06 -$ 0.08
62 15 $ 2.50 3.22% -$ 0.07 -$ 0.08
 P Q R S T
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32 Display setting Profit range settings
33 min r 2.00% 26
34 max 20.00% 1 1000.00% 1
35 25 25
36 Label:
37 Elasticity : 0.4No banks: 4
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