Question 1
With ________, the quality of what is being offered in a transaction matters and is not easily demonstrated.
◦ asymmetric information
◦ adverse selection
◦ risk aversion
◦ moral hazard
Question 2
You are in the market for a used 2006 Honda Accord. You know that half of the 2006 Accords are lemons and half are peaches. If you could be assured that the Accord you were buying was a peach, you would be willing to pay up to $10,000. On the other hand, you would only be willing to pay $2,000 for a lemon. You have no ability to discern whether any particular Accord is a lemon or a peach. Sellers of Accords, on the other hand, are likely to know whether their particular car is a lemon or a peach. Suppose sellers of lemons will sell their cars for $1,500 or more and peach sellers will be willing to sell their cars for $8,500 or more. You are willing to offer ________ for a car of unknown quality and ________ are willing to sell you their car.
◦ $2,000; lemon owners only
◦ $5,000; lemon owners only
◦ $6,000; lemon owners only
◦ $8,500; both lemon and peach owners
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