An Asymmetric Information Problem Arises When

question 33

Multiple Choice

An asymmetric information problem arises when

• A)the representative firm is unable to borrow.
• B)there are more bad firms than good firms that wish to borrow.
• C)interest rates exceed r.
• 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:

Labour

The human effort, both physical and mental, used in the production process.

Fixed Budget

A budget that remains constant, regardless of changes in business activity levels.

Allocate Resources

The process of distributing available resources, such as time, money, and manpower, among various tasks or projects.

Specific Purpose

The precise goal or objective that an individual, group, or organization aims to achieve within a defined timeline.