In the Used Car Market,adverse Selection Creates the Lemon Problem

question 47

Multiple Choice

In the used car market,adverse selection creates the lemon problem when

• A) sellers cannot judge buyers' creditworthiness.
• B) buyers believe that sellers will offer only high-priced "good" used cars for sale..
• C) buyers believe that sellers will sell only lemons.
• D) sellers offer warranties on all used cars.
• E) None of the above answers are correct because it is moral hazard that creates the lemon problem.

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Definitions:

Cost Method

is an accounting approach used for recording investments, where the investment is recorded at its acquisition cost and adjustments are made for dividends or interest earned and changes in value are not recognized until sold.

Trading Securities

Trading securities are investments in debt or equity that are purchased with the intention of selling them in the near term to realize short-term gains.

Comprehensive Income

The change in equity (net assets) of a business enterprise during a period from transactions and other events from non-owner sources. It includes all revenues, gains, expenses, and losses.

Cash Flows

The aggregate sum of money flowing in and out of an enterprise, crucially influencing its financial fluidity.