In the Used Car Market,adverse Selection Creates the Lemon Problem

question 75

Multiple Choice

In the used car market,adverse selection creates the lemon problem when

• A) sellers cannot judge buyers' creditworthiness.
• B) buyers believe that sellers will offer only high-priced "good" used cars for sale.
• C) buyers believe that sellers will sell only lemons.
• D) sellers offer warranties on all used cars.
• E) None of the above answers is correct because it is moral hazard that creates the lemon problem.

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Definitions:

Depreciation Expense

The allocated portion of an asset's cost expensed each year over its useful life to account for its wear and tear, obsolescence, or decline in value.

End-Of-Period Spreadsheet

A tool used in accounting to compile all balances and adjustments of an accounting period before preparing the final financial statements.

Retained Earnings

The portion of net income that is held by a company and not distributed to shareholders as dividends, used for investment or debt repayment.

Revenues

The complete earnings derived from transactions involving goods or services that are fundamental to an organization's core functions.