In the used car market,adverse selection creates the lemon problem when
A) sellers cannot judge buyers' creditworthiness.
B) buyers believe that sellers will offer only high-priced "good" used cars for sale..
C) buyers believe that sellers will sell only lemons.
D) sellers offer warranties on all used cars.
E) None of the above answers are correct because it is moral hazard that creates the lemon problem.

Question

Quizplus · Accepted Answer

Adverse selection creates the lemon problem when buyers believe that sellers will sell only lemons. This means that buyers assume that sellers have more information about the quality of the car than they do and are choosing to sell the worst cars (lemons) while keeping the better ones for themselves. This creates a market where only the worst cars are sold, driving down prices and reducing overall quality.

In the Used Car Market,adverse Selection Creates the Lemon Problem