Adverse selection occurs when an agreement encourages undesirable ...

[sarasara]

Adverse selection occurs when an agreement encourages undesirable behavior.
 
  Indicate whether the statement is true or false

Question 2

Suppose that everyone is risk neutral and buyers cannot identify the lemons. The expected value of a used car is 8,000. No good cars will be sold in this market
 
  A) unless the sellers of good cars place a value greater than 8,000 on their cars.
  B) unless the sellers of lemons place a value greater than 8,000 on their cars.
  C) unless sellers engage in cheap talk.
  D) unless the sellers of good cars place a value lesser or equal to 8,000 on their cars.

[batool]

Answer to Question 1

False. This is a moral hazard. Adverse selection occurs if the offer to make an agreement attracts a certain type person who undertakes the undesirable behavior anyway.

Answer to Question 2

D