The adverse selection problem suggests that
A) the ratio of lemons (low quality) to plums (high quality) is likely to be high.
B) the ratio of plums (high quality) to lemons (low quality) is likely to be high.
C) the price of lemons (low quality) will be below buyer's willingness to pay.
D) plums (high quality) will sell for more than most buyers' willingness to pay.

Question

Quizplus · Accepted Answer

The adverse selection problem arises when the sellers have more information about the product than the buyers. In such a scenario, the sellers with low-quality goods (known as lemons) have a higher incentive to sell, while the sellers with high-quality goods (known as plums) have a lesser incentive to sell. This leads to a higher ratio of lemons to plums, and hence, Choice A is the correct answer.

The Adverse Selection Problem Suggests That