The Problem of Adverse Selection

question 140

Multiple Choice

The problem of adverse selection:

• A)occurs when sellers (who know more than buyers about the quality of the product)deliberately select inferior products to sell.
• B)is also referred to as the moral hazard problem.
• C)can result in an overall increase in the gains from trade.
• D)occurs when an employer fires the wrong person.

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Definitions:

Money Spread

The difference between two prices or rates, often used to describe the gap between bid and ask prices in financial markets.

Call Option

A financial contract that gives the holder the right, but not the obligation, to buy a stock, bond, commodity, or other assets at a predetermined price within a set time frame.

Covered Call

An options strategy where an investor holds a long position in an asset and sells call options on that same asset to generate income from the option premiums.

Exchange-Traded Options

Options contracts that are traded on a regulated exchange rather than being dealt with privately between two parties.