Upon learning that his auto transmission is about to fail, Ray Roma sells his car to an unsuspecting buyer. This circumstance illustrates the
A) adverse selection problem.
B) free-rider problem.
C) moral hazard problem.
D) principal-agent problem.

Question

Quizplus · Accepted Answer

Adverse selection problem occurs when one party has more information than the other party, leading to a situation where the uninformed party makes a decision that is disadvantageous. In this case, Ray Roma had information that his car was about to fail, but he did not disclose it to the buyer. Because of this, the buyer was at a disadvantage and ended up buying a faulty car. Thus, this circumstance illustrates the adverse selection problem.

Upon Learning That His Auto Transmission Is About to Fail