1. The problem of adverse selection: A. occurs when sellers (who know more about the quality of...
Question:
1. The problem of adverse selection:
A. occurs when sellers (who know more about the quality of what they are selling than buyers) deliberately select inferior products to sell.
B. is also referred to as the moral hazard problem.
C. can result in an overall increase in the gains from trade.
D. occurs when an employer fires the wrong person.
2. Jared has $12,000 to lend at an annual interest rate of 6%. Suppose at the end of one year, he reinvests the original $12,000 plus his interest earnings for a second year at the same rate of interest.
How much money will he have at the end of two years?
A. $12,720.00
B. $12,982.00
C. $13,118.50
D. $13,483.20
Asymmetric Information:
Asymmetric information refers to a situation in which the lack of information by the economic agents causes market failure. The lack of symmetry can result in problems like moral hazard and adverse selection. In adverse selection, wrong choices are made by the economic agents before a deal is placed; whereas, in case of moral hazard the inefficiency is experienced after the deal is placed.
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