Which of the Following Is True of Adverse Selection

question 239

Multiple Choice

Which of the following is true of adverse selection?

• A)​It can result when one of the parties to a transaction has little information about the quality of the goods involved.
• B)​It can cause the quality of goods traded to fall, if quality detection costs are high.
• C)​It can be a difficult problem to overcome, because it is not individually rational for the transactor with the superior information to provide a truthful and complete disclosure.
• D)​All of the above are true.

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Definitions:

Moral Hazard

The situation in which an individual or entity is more likely to take risks because the potential costs will not be borne by them but by another party.

Efficient Behavior

Efficient behavior refers to actions that maximize the desired outputs or results with the least amount of wasted effort or resources.

Insurance Industry

The sector of the economy that provides coverage against financial loss, including various types of insurance products and services.

Moral Hazard

The risk that one party to a contract can change their behavior to the detriment of another after the contract has been concluded.