In the market for used electric wheelchairs, there are high- and low-quality wheelchairs. Potential buyers cannot determine prior to purchase whether a wheelchair is high or low quality. The following statement that best describes what is likely to happen in this market is
A) this is an example of adverse selection, as the buyer will have more information about the quality of the used wheelchair than will the seller.
B) over time the market price of a used wheelchair will increase, as there is more of an incentive for owners of high-quality wheelchairs to sell than owners of low-quality wheelchairs.
C) the price of a used wheelchair will be very close to the value of a high-quality wheelchair, which will encourage people to sell high-quality wheelchairs.
D) the price of a used wheelchair will be between the buyer and seller values for low-quality wheelchairs. This will encourage people to withdraw high-quality wheelchairs from the market.

Question

Quizplus · Accepted Answer

This scenario is a classic example of adverse selection, where the market cannot differentiate between high- and low-quality goods, leading to a market price that reflects the average quality. High-quality goods are then less likely to be sold, as their value is not fully recognized, causing them to be withdrawn from the market.

In the Market for Used Electric Wheelchairs, There Are High-