Use the Following to Answer Questions

question 182

Multiple Choice

Use the following to answer questions
Scenario: Used Car Market
In the used car market, cars of poor quality are called lemons, while cars of good quality are plums. Suppose the probability of obtaining a lemon is 60% and the probability of obtaining a plum is 40%. Also assume a plum is worth $15,000 and a lemon is worth $3,000.
-(Scenario: Used Car Market) Look at the scenario Used Car Market. Adverse selection in this used car market occurs because of:

• A) asymmetric information.
• B) risk-loving behavior.
• C) moral hazard.
• D) diversification.
• Answer Key

---

Definitions:

Dividends

Payments made by a corporation to its shareholders, usually from profits.

Equity Method

An accounting technique used by companies to assess the profits earned by their investments in other companies, where the investment is recorded initially at cost and adjusted thereafter for the post-acquisition change in the investor's share of the investee's net assets.

Gross Profit

The profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services.

Dividends

Cash distributions made to shareholders by a corporation, typically from the company's earnings as profit.