If a Seller of a High-Quality Good Cannot Prove the Quality

question 268

Multiple Choice

If a seller of a high-quality good cannot prove the quality of that good

• A) buyers will not be willing to pay the amount for which they value a high-quality good.
• B) buyers will only be willing to pay the amount for which they value a low-quality good.
• C) the good will never be offered for sale.
• D) the good will trade at its equilibrium price.

---

Definitions:

Bankruptcy Risk

Bankruptcy risk refers to the likelihood that a company will be unable to meet its debt obligations and may be forced into bankruptcy.

Agency Costs

Expenses arising from the conflict of interest between a company's management or its shareholders and its creditors.

Financial Risk

The risk added by the use of debt financing. Debt financing increases the variability of earnings before taxes (but after interest); thus, along with business risk, it contributes to the uncertainty of net income and earnings per share. Business risk plus financial risk equals total corporate risk.

Market Risk

The possibility for an investor to experience losses due to factors that affect the overall performance of the financial markets.