If the opportunity cost of sending a market signal if too great for risky people and low enough for safe people, there will exist a(n)
A) pooling equilibrium
B) separating equilibrium
C) adverse equilibrium

Question

Quizplus · Accepted Answer

A separating equilibrium occurs when different types of individuals (e.g., risky and safe) choose different actions or signals that reveal their type to the market. In this case, if the opportunity cost of sending a market signal is too high for risky people but low enough for safe people, safe people will send the signal while risky people will not, effectively separating themselves and leading to a separating equilibrium.

If the Opportunity Cost of Sending a Market Signal If