New home buyers are all financially protected

New home buyers are all financially protected against bankruptcy of the contractor because of a law requiring the contractor to get bank backing to insure all individual investments. An economist argues that this insurance is partly responsible for the high rate of bankruptcies among contractors, since it removes from buyers any financial incentive to find out the financial status of the contractor they are hiring. If buyers were more selective, then contractors would need to be secure in order to compete for buyers.

The economist's argument makes which of the following assumptions?

(A) Bankruptcy is caused when contractors default on loan repayments to their banks.

(B) A significant proportion of contractors use the services of sub-contractors to do the bulk of the work.

(C) The more a home buyer has to invest in a house he or she is building, the more careful he or she tends to be in selecting a contractor.

(D) The difference in the payment schedules to contractors is not a significant factor in bankruptcies.

(E) People looking for a contractor to build their houses are able to determine which contractors are secure against bankruptcy.


The best answer is E.  The economist’s assumption is that what he is proposing can be implemented.  If those people looking for a contractor are unable to determine which ones are secure against bankruptcy, then buyers do not have the option of being more selective in their choice of contractor.