Two Consequences of Asymmetric Information Are Adverse Selection and Moral

question 53

Multiple Choice

Two consequences of asymmetric information are adverse selection and moral hazard.An important distinction between the two is

• A)adverse selection exists prior to the completion of a transaction while moral hazard occurs after the transaction is completed.
• B)moral hazard exists prior to the completion of a transaction while adverse selection occurs after the transaction is completed.
• C)adverse selection leads to an inefficient quantity while moral hazard leads to an efficient quantity.
• D)moral hazard leads to an inefficient quantity while adverse selection leads to an efficient quantity.

---

Definitions:

Wage Rate

The standard amount of compensation paid to an employee per unit of time worked, typically expressed on an hourly or monthly basis.

Competitive Market

A market structure characterized by a large number of buyers and sellers, free entry and exit, and a product that is similar across suppliers, leading to price determination by supply and demand.

Production Function

A mathematical schema that links the inputs utilized in creating goods or services to the outputs produced.

Supply Function

A mathematical relationship that expresses the quantity of a good or service supplied in relation to its price.