Rhonda would like a better bicycle, and she considers selling her old one by advertising on the bulletin board in the student center. She decides against it because the used bicycles listed on the board are underpriced. This describes the problem of:
A) adverse selection.
B) moral hazard.
C) positive correlation.
D) risk aversion.

Question

Quizplus · Accepted Answer

Adverse selection occurs when there is asymmetric information between buyers and sellers, leading to the market being dominated by low-quality goods. Rhonda's decision against selling her bicycle due to underpricing on the bulletin board reflects her concern that only low-quality bicycles are being sold there, which is a classic example of adverse selection.

Rhonda Would Like a Better Bicycle, and She Considers Selling