An Asymmetric Information Problem Arises When

question 11

Multiple Choice

An asymmetric information problem arises when

• A) interest rates exceed r.
• B) the representative firm is unable to borrow.
• C) there are more bad firms than good firms that wish to borrow.
• D) the lender is not able to distinguish between a good borrower and a bad borrower.
• E) the managers of bad firms consumer the borrowed funds as executive compensation.

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Definitions:

Marginal Revenue

The increase in revenue that results from selling one additional unit of a product or service.

Horizontal Axis

The “left-right” or “west-east” measurement line on a graph or grid.

Economic Profit

The discrepancy between a company's complete income and its aggregate expenditures, covering both out-of-pocket and assumed costs.

Purely Competitive

A market structure characterized by a large number of sellers offering identical products, with easy market entry and exit and no single seller controlling market prices.