Which of the Following Is Not True of Adverse Selection

question 91

Multiple Choice

Which of the following is not true of adverse selection?

• A) It exists because information is perfect.
• B) It describes the problem a lender faces in identifying loan applicants as good or bad risk borrowers.
• C) It arises because borrowers have more information than lenders regarding their creditworthiness.
• D) It arises if lenders try to charge an average price to all applicants.

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Definitions:

Variable Costing

An accounting method that considers only variable costs in calculating the cost of goods sold and determines contribution margin.

Fixed Overhead

Costs that do not change with the level of production activity, such as rent, salaries, and insurance.

Operating Income

Earnings from a company's core business operations, excluding expenses and revenues from non-operational activities like investment income.

Absorption Costing

A costing method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed manufacturing overhead—in the cost of a product.