There Is an Adverse Selection Problem in the Market for Used

question 135

Multiple Choice

There is an adverse selection problem in the market for used cars because

• A) owners of poor-quality cars have a strong incentive to sell their cars, while owners of high- quality used cars have more incentive to keep their cars.
• B) owners of high-quality cars will have a strong incentive to sell their cars to obtain the higher prices, while owners of poor-quality cars will have more incentive to keep theirs.
• C) most people prefer new cars, but the high prices for new cars force most of them to buy used cars.
• D) government actions to pass "lemon" laws have reduced information on used cars.

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Definitions:

Income Statement

A financial statement that reports a company's financial performance over a specific accounting period, detailing revenues, expenses, and net income or loss.

Accrual Basis

An accounting method where revenues and expenses are recorded when they are earned or incurred, regardless of when the cash is actually received or paid.

Cash Basis

A method of accounting where revenue and expenses are recognized only when cash is received or paid, respectively.

T-account

A visual representation used in accounting to depict the debit and credit sides of accounts, helping in the preparation and understanding of double-entry accounting systems.