Acme Widget Tells Investors It Wants to Build a New

question 49

Multiple Choice

Acme Widget tells investors it wants to build a new widget factory and sell investors $10,000,000 in bonds to finance it. Once they have raised the $10,000,000 the owners of Acme Widget use the funds to finance a trip to Atlantic City to try out a new scheme they have devised to win at blackjack. This is an example of

• A)the adverse selection problem in financial markets.
• B)the moral hazard problem in financial markets.
• C)the difficulty lenders have in distinguishing good from lemon firms.
• D)the problems with using rational expectations in financial markets.

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Definitions:

Traction

The application of a pulling force to parts of the body to align and immobilize fractures or to relieve pressure on skeletal or soft tissues.

Aspirin

A medication used to reduce pain, fever, inflammation, and, in low doses, to prevent blood clots.

Startle

A quick, automatic response to a sudden unexpected stimulus, often characterized by jerking bodily motions.

Drainage

The removal of fluids from a body cavity, wound, or other source, often for therapeutic reasons.