Question 1
If ________ enters into an exchange with another party who has ________ information, there is asymmetric information and adverse selection.
◦ a buyer or seller; an equal amount of
◦ a buyer or seller; more
◦ only a buyer, but not a seller; more
◦ only a seller, but not a buyer; more
Question 2
In the market for used electric wheelchairs, there are high- and low-quality wheelchairs. Potential buyers cannot determine prior to purchase whether a wheelchair is high or low quality. The following statement that best describes what is likely to happen in this market is
◦ this is an example of adverse selection, as the buyer will have more information about the quality of the used wheelchair than will the seller.
◦ over time the market price of a used wheelchair will increase, as there is more of an incentive for owners of high-quality wheelchairs to sell than owners of low-quality wheelchairs.
◦ the price of a used wheelchair will be very close to the value of a high-quality wheelchair, which will encourage people to sell high-quality wheelchairs.
◦ the price of a used wheelchair will be between the buyer and seller values for low-quality wheelchairs. This will encourage people to withdraw high-quality wheelchairs from the market.
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