Gary is a recent college graduate. After six months at his new job, he has final
ID: 1228100 • Letter: G
Question
Gary is a recent college graduate. After six months at his new job, he has finally saved enough to buy his first car.
Gary knows very little about the difference between makes and models. How could he use market signals, reputation, or standardization to make comparisons?
To determine a car's value, Gary could
A.
refuse to take the car for a test drive.
B.
obtain a vehicle evaluation from an independent mechanic.
C.
rely on a warranty as a signal the car will not perform as advertised.
D.
use information on seller type because individual sellers are more likely to have a reputation.
E.
consider the type of seller because new-car dealers have less information about car value.
You are a loan officer in a bank. After selecting a car, Gary comes to you seeking a loan. Because he has only recently graduated, he does not have a long credit history. Nonetheless, the bank has a long history of financing cars for recent college graduates. Is this information useful in Gary's case? If so, how?
This information is
A.
not useful because banks can obtain information through vehicle inspection about the value of Gary's car.
B.
not useful because banks have more information about
Gary's ability to pay back the loan than Gary does.
C.
useful because other recent college graduates
successfully paying back their loans signals that Gary is likely to
have the ability to pay back a loan.
D.
not useful because banks already have sufficient information about Gary's ability to pay back the loan to determine whether to make the loan.
E.
useful because a bank that has already made loans to recent college graduates is more likely to make a loan to Gary.
Explanation / Answer
E. useful because a bank that has already made loans to recent college graduates is more likely to make a loan to Gary. Banks know about their ability to repay the loan and in any case banks have the mortgage fro recovery. So they will give the loan.
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