Question

10. Problems and Applications Q10 The government is considering two ways to help the needy: giving them cash or giving them free meals at soup kitchens. Which of the following arguments is based on the notion of asymmetric information? The government does not have complete information about how the needy will spend the cash, so free meals ensure they get the food they need. People often abandon their long-term plans in favor of instant gratifications, such as indulging drug or alcohol habits. The government therefore provides the needy with free meals rather than cash. O Cash is better because individual consumers can maximize their utility and purchase what they need most.

Answer 1

Argument 1 is based on asymmetric information . There is no complete information . The needy might end up misusing the cash but it is not sure that they will do drugs and consume alcohol ( so argument 2 is not do valid ) . Hence there is certain uncertainty . So a needy person himself knows how he will spend the cash . So one party has more information than another .