An Asymmetric Information Problem Arises When

question 21

Multiple Choice

An asymmetric information problem arises when

• A) interest rates exceed r.
• B) the representative firm is unable to borrow.
• C) there are more bad firms than good firms that wish to borrow.
• D) the lender is not able to distinguish between a good borrower and a bad borrower.
• E) the managers of bad firms consumer the borrowed funds as executive compensation.

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Definitions:

Collections

The process of gathering money that is owed by customers, often in relation to accounts receivable.

Required Production

The quantity of goods that a company needs to produce in order to meet customer demand.

Ending Raw Materials Inventory

The value of raw materials still on hand at the end of an accounting period, which have not yet been used in the production process.

Budgeted

Pertains to the financial plans for revenues and expenses that an organization sets for a specific time period.