Because of the lemons problem in the used car market, the average quality of the used cars offered for sale will be ________, which gives rise to the problem of ________.
A) low; moral hazard
B) low; adverse selection
C) high; moral hazard
D) high; adverse selection

Question

Quizplus · Accepted Answer

The lemons problem refers to the fact that buyers of used cars cannot determine the quality of the car before purchase, leading to adverse selection where only lower quality cars are willing to be sold at the same price as higher quality cars. Therefore, the average quality of the used cars offered for sale will be low. Moral hazard refers to a situation where one party takes additional risk because another party has agreed to bear the consequences of that risk, but this is not directly related to the lemons problem in the used car market.

Because of the Lemons Problem in the Used Car Market