What Is Adverse Selection

question 70

Multiple Choice

What is adverse selection?

• A)It refers to the private, self-interested actions people that people pursue, which when taken collectively leads to a loss in economic surplus.
• B)It refers to the actions people take after they have entered into a transaction that make the other party to the transaction worse off.
• C)It refers to the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction.
• D)It refers to the actions people take before they enter into a transaction so as to mislead the other party to the transaction.

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Definitions:

Voting Shares

Shares of a corporation's stock that grant the shareholder the right to vote on corporate matters, such as the election of the board of directors.

Acquisition

The process by which one company takes control of another company by purchasing or exchanging equity.

Contingency Payment

A payment that depends on the occurrence of a specific condition or set of conditions in the future.

Discount Rate

The interest rate used to determine the present value of future cash flows in discounted cash flow analysis, reflecting the time value of money and risk.