That most used cars are sold by intermediaries (i.e., used car dealers) provides evidence that these intermediaries ________.
A) have solved the moral hazard problem created by the consumers of used cars
B) are not able to prevent others from free-riding off the information that they provide
C) help solve the adverse selection problem
D) only sell "lemons"

Question

Quizplus · Accepted Answer

The fact that most used cars are sold by intermediaries (used car dealers) suggests that they are able to help solve the adverse selection problem. Intermediaries have access to more information about the condition and history of the vehicle than a buyer may have, and can therefore help to reduce the risks associated with buying a used car. Option A is incorrect because intermediaries may not be able to solve the moral hazard problem completely, as there may still be a risk that the seller misrepresents the condition of the car. Option B is incorrect because intermediaries may be able to prevent free-riding by providing important information that is otherwise difficult to obtain. Option D is incorrect because while some used car dealers may sell "lemons," it is not true that they only sell such vehicles.

That Most Used Cars Are Sold by Intermediaries (I