The Problem of Adverse Selection Helps to Explain ________

question 21

Multiple Choice

The problem of adverse selection helps to explain ________.

• A) which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from securities markets
• B) why direct finance is more important than indirect finance as a source of business finance
• C) why collateral is not an important feature of debt contracts
• D) why banks prefer to make loans unsecured

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Definitions:

Game Theory

A branch of mathematics and economics that studies strategic interactions where the outcomes depend on the actions of all participants.

Strategic Situations

Scenarios in which individuals or organizations must consider the actions and reactions of others when making decisions.

Competitive Markets

Markets characterized by a large number of buyers and sellers where no single entity has enough power to influence the price of goods or services significantly.

Four-firm Concentration Ratio

A measure indicating the total market share controlled by the four largest firms in an industry, used to determine the competitiveness of the market.