Upon learning that his auto transmission is about to fail, Ray sells his car to an unsuspecting buyer. This circumstance illustrates the
A) adverse selection problem.
B) free-rider problem.
C) moral hazard problem.
D) principal-agent problem.

Question

Quizplus · Accepted Answer

Adverse selection occurs when one party in a transaction has more information than the other, particularly in situations where the party with more information uses it to their advantage. In this case, Ray knows about the failing auto transmission but does not disclose this information to the buyer, leading to adverse selection.

Upon Learning That His Auto Transmission Is About to Fail