Which of the following is true of adverse selection?
A)It can result when one of the parties to a transaction has little information about the quality of the goods involved.
B)It can cause the quality of goods traded to fall, if quality detection costs are high.
C)It can be a difficult problem to overcome, because it is not individually rational for the transactor with the superior information to provide a truthful and complete disclosure.
D)All of the above are true.

Question

Which of the following is true of adverse selection?
A)​It can result when one of the parties to a transaction has little information about the quality of the goods involved.
B)​It can cause the quality of goods traded to fall, if quality detection costs are high.
C)​It can be a difficult problem to overcome, because it is not individually rational for the transactor with the superior information to provide a truthful and complete disclosure.
D)​All of the above are true.

Quizplus · Accepted Answer

All three statements are true about adverse selection. A) is true because when one party has little information about the quality of the goods involved, it can lead to adverse selection. B) is true because if quality detection costs are high, sellers may not invest in quality assurance, which can cause a fall in the quality of goods traded. C) is true because the transactor with superior information may have the incentive to withhold information or not disclose the full extent of the information they have in order to receive a better deal.

Which of the Following Is True of Adverse Selection