The Problem of Adverse Selection Helps to Explain ________

question 51

Multiple Choice

The problem of adverse selection helps to explain ________.

• A) why banks prefer to make loans unsecured
• B) why banks do not have advantage in raising funds for businesses
• C) why borrowers are willing to offer collateral to secure their promises to repay loans
• D) why the financial system is so heavily regulated

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Definitions:

Mark-Up Percentage

The percentage added to the cost price of goods to cover overhead and profit in the selling price.

Price Elasticity

A measure of how much the quantity demanded of a good responds to a change in the price of that good.

Sales Volume

The number of units of a product or service sold in a specific period of time, indicative of consumer demand and business performance.

Demand Elastic

Refers to the degree to which demand for a good or service varies with its price. High elasticity indicates demand changes significantly with price changes, while low elasticity indicates little to no change.