Which of the Following Is Not True of Adverse Selection

question 104

Multiple Choice

Which of the following is not true of adverse selection?

• A) It can result when one of the parties to a transaction has little information about the quality of the goods involved.
• B) It can cause the quality of goods traded to fall, if quality detection costs are high.
• C) It can be a difficult problem to overcome, because it is not individually rational for the transactor with the superior information to provide a truthful and complete disclosure.
• D) All of the above are true.

---

Definitions:

Debt-to-Total-Assets Ratio

A measure of a company's financial leverage calculated by dividing its total liabilities by its total assets, showing what portion of the assets is financed by debt.

Net Income

The remaining earnings of a business following the deduction of all expenses and tax liabilities from its total revenue.

ROE

Return on Equity is a measure of financial performance calculated by dividing net income by shareholders' equity, indicating how well a company utilizes investments to generate earnings growth.

Current Ratio

The Current Ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year, by comparing a company's current assets to its current liabilities.