Which of the following four options is a possible result of adverse selection?
a. Only lemons remain in the market for used cars. b. A store manager shirks his reponsibility because his supervisor is not present at all times. c. A car mechanic does not bother to properly fix the customer's cars when his work cannot be monitored. d. Many people selling their houses at very low prices expecting prices to decline further.
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Of these options, the best example of adverse selection is choice C.
One definition of adverse selection is that it is a situation in which there is asymmetric information between buyers and sellers. In the case of C the mechanic is the seller and the customers are the buyers. The customers have less information than the mechanic. They do not know (and cannot know) if his work is done well. Because they do not know, they pick him and get a bad product. Because this bad result comes from a lack of information on their part, this is adverse selection.
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