Analysis of Adverse Selection Indicates That Financial Intermediaries,especially Banks

question 83

Multiple Choice

Analysis of adverse selection indicates that financial intermediaries,especially banks

• A)have advantages in overcoming the free-rider problem,helping to explain why indirect finance is a more important source of business finance than is direct finance.
• B)despite their success in overcoming free-rider problems,nevertheless play a minor role in moving funds to corporations.
• C)provide better-known and larger corporations a higher percentage of their external funds than they do to newer and smaller corporations which rely to a greater extent on the new issues market for funds.
• D)must buy securities from corporations to diversify the risk that results from holding non-tradable loans.

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Definitions:

MC

Marginal cost, the increase in total cost that arises from an extra unit of production, important for decision-making in production and pricing.

ATC

Average Total Cost; the total cost of production (fixed plus variable costs) divided by the total quantity of output produced, representing the average cost per unit of output.

AVC

Average Variable Cost, the cost a company incurs to produce one additional unit of product, excluding fixed costs.

Corrosion

The process of deterioration and consumption of a material through a chemical reaction with its environment, often leading to weakening or destruction of the material.