(Scenario: The Market for Experienced Vehicles) Use Scenario: The Market for Experienced Vehicles. Adverse selection occurs in the used-car market because of:
Scenario: The Market for Experienced Vehicles
In the used-car market, cars of poor quality are called lemons, while cars of good quality are called plums. Suppose that the probability of obtaining a lemon is 60%, and the probability of obtaining a plum is 40%. Also, assume that a plum is worth $15,000 and that a lemon is worth $3,000.
A)private (asymmetric) information.
B)risk-loving behavior.
C)moral hazard.
D)diversification.

Question

Quizplus · Accepted Answer

Adverse selection occurs in the used-car market because the seller has more information about the car they are selling than the buyer. In this case, the seller knows whether the car is a lemon or a plum, while the buyer does not. This information asymmetry leads to adverse selection, as buyers are more likely to end up with a lemon due to the seller's hidden knowledge.

(Scenario: the Market for Experienced Vehicles) Use Scenario: the Market