Two types of problems that arise due to asymmetric information are:
A) systematic and idiosyncratic risk.
B) risk aversion and diversification
C) illiquidity and insolvency.
D) moral hazard and adverse selection.

Question

Quizplus · Accepted Answer

Asymmetric information refers to a situation where one party in a transaction has more information than the other party. This can lead to two types of problems: moral hazard and adverse selection. Moral hazard occurs when the party with less information takes additional risks because they are not fully aware of the risks involved. Adverse selection occurs when the party with more information uses this knowledge to their advantage and selects the options or terms that benefit them the most. Both of these problems can lead to market inefficiencies and suboptimal outcomes for both parties involved.

Two Types of Problems That Arise Due to Asymmetric Information