Market Failure Due to Asymmetric Information Is Illustrated in Which

question 208

Multiple Choice

Market failure due to asymmetric information is illustrated in which situation?

• A) A company sells a product with harmful ingredients. The ingredients are listed on the label in small print.
• B) Consumers seek to buy a product because it tastes good, even though they know that it contains harmful ingredients.
• C) Consumers buy a product labeled as foot cream, but they use it as eye cream even though there is a warning on the label to use it only on feet.
• D) A company does not list all a product's ingredients on the label. Customers buy the product, unaware that it contains harmful ingredients.

---

Definitions:

Option Holder

An individual or entity that has the rights, but not the obligation, to buy or sell an asset at a predetermined price before or at the expiration of a contract.

Call Option

A financial contract that gives the buyer the right, but not the obligation, to buy an underlying asset at a specified price within a certain time period.

Put Option

A financial contract that gives the holder the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specific time frame.

Long Straddle

A long straddle strategy involves simultaneously buying a put and call option on the same asset with the same strike price and expiration date, benefiting from a strong move in either direction.