The Concept of Adverse Selection Helps to Explain All of the Following

question 33

Multiple Choice

The concept of adverse selection helps to explain all of the following except

• A) why firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets.
• B) why indirect finance is more important than direct finance as a source of business finance.
• C) why direct finance is more important than indirect finance as a source of business finance.
• D) why the financial system is so heavily regulated.

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Definitions:

Horizontal Price Fixing

Occurs when competitors that produce and sell competing products collude, or work together, to control prices, effectively taking price out of the decision process for consumers.

Experience Curve Effect

Refers to the drop in unit cost as the accumulated volume sold increases; as sales continue to grow, the costs continue to drop, allowing even further reductions in the price.

Unit Cost

The cost incurred to produce, acquire, or sell one unit of a product or service, calculated by dividing total costs by the number of units.

Product Volume

The quantity of units of a particular product sold or produced.