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Scenario: Used-Car Market
In the used-car market,cars of poor quality are called lemons,whereas cars of good quality are called plums.Suppose that the probability of obtaining a lemon is 60% and the probability of obtaining a plum is 40%.Also,assume that a plum is worth $15 000 and a lemon is worth $3 000.
-(Scenario: Used-Car Market)Use Scenario: Used-Car Market.Adverse selection in this used-car market occurs because of:
A) asymmetric information.
B) risk-loving behaviour.
C) moral hazard.
D) diversification.

Question

Quizplus · Accepted Answer

Adverse selection occurs in a used-car market due to asymmetric information, which means that one party (the seller) has more information about the quality of the car than the other party (the buyer). This information asymmetry can lead to the buyer being more likely to end up with a lemon, as the seller may be more likely to sell it to them at the plum price. This is an example of adverse selection, which is a failure of the market to allocate goods efficiently.

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