University of central punjab Assignment 1

Submitted by: Humza shahid Reg no L1F07bbam2163 Submitted to: Prof Q.Abbas

Question 1
Think of an example in which you have to deal with the adverse selection problem. suppose that a landlord owns a number of rental properties and wants to hire someone to mow the lawns and do general yard maintenance for the properties. In this case, further assume that the landlord has decided on a predetermined amount that he is willing to pay per property for this work, and this amount is well below current market value. The landlord advertises the job and it is accepted by a contractor with very little discussion on exactly what work should be performed. The landlord is expecting a very high quality job to be done, and each yard to be meticulously cared for. Based on the payment being offered, however, the contractor assumes that the landlord only wants minimal yard work done and only provides basic service.

Question 2
In a world without information and transaction costs, fiancial intermerdaries would not exist is this statement true, false, or uncertain? Explain your answer. This statement is true because if the intermerdaries dont have information about borrower and lander then how it will exist if he dont know who is giving money and who want money then how it will exist and second it can its can not live without transaction costs because this cost is earning for intermerdaries if he/she will not earn then why he will do this work for example if the broker will not charger his commision then from where he will earn.