What is adverse selection?
A) It refers to the private, self-interested actions people that people pursue, which when taken collectively leads to a loss in economic surplus.
B) It refers to the actions people take after they have entered into a transaction that make the other party to the transaction worse off.
C) It refers to the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction.
D) It refers to the actions people take before they enter into a transaction so as to mislead the other party to the transaction.
Answer: C
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Suppose people buy more of good 1 when the price of good 2 falls. These goods are
A) complements. B) substitutes. C) normal. D) inferior.
If the present value equation used to calculate the price of a stock you are considering buying is "[$7 / (0.04 - 0.03)]," which of the following is correct, assuming that dividends will grow at a constant rate?
A) The stock price is $7, the dividend growth rate is 3 percent, and the interest rate is 1 percent. B) The stock price is $700, the dividend growth rate is 3 percent, and the interest rate is 4 percent. C) The dividend is $7 per share, the dividend growth rate is 1 percent, and the interest rate is 4 percent. D) The dividend is $7 per share, the dividend growth rate is 4 percent, and the interest rate is 3 percent.