Scenario: Mike wants to buy an ancient painting from a curator. Mike values the original painting at $50,000, while he does not have any value for a fake one. However, he cannot differentiate between the original painting and a fake painting.
-Refer to the scenario above.If the curator values the painting at $45,000,which of the following problems is likely to arise?
A) Adverse selection
B) The free-rider problem
C) The paradox of thrift
D) The tragedy of the commons

Question

Quizplus · Accepted Answer

Adverse selection occurs when one party in a transaction has more information than the other party, leading to unequal bargaining power and potentially negative outcomes. In this scenario, Mike cannot differentiate between the original painting and a fake painting, so he is at a disadvantage in the transaction. The curator may take advantage of this and sell him a fake painting for the higher price, resulting in adverse selection.

Scenario: Mike Wants to Buy an Ancient Painting from a Curator