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:

Acid-Test Ratio

A liquidity ratio that measures a company's ability to pay off its current liabilities with quick assets, excluding inventory.

Current Ratio

A liquidity ratio that measures a company's ability to pay short-term obligations by comparing current assets to current liabilities.

Interim Income Statements

Financial statements reporting a corporation's financial performance for a period shorter than a fiscal year, often quarterly.

Expenses

Costs incurred in the process of earning revenue, including operational costs, salaries, and utilities, among others.