Question

The domination of the used-car market by lemons is an example of a market in which the goods left in the market are the undesirable goods. This problem is called __________.A. adverse selection

B. Moral Hazard
C. Asymmetric information

Answer 1

A. adverse selection

Step-by-step explanation:

The example of the used-car market is used to explain problems of information asymmetries but in specific the adverse selection. In the example of the used-car market the sellers have more information than the buyers because sellers know if the car is good or bad quality (lemons), but buyers don´t. Because buyers do not know this information (which car is good or bad), they decide to lower the price. At lower prices only lemons or bad cars will be sold, and good used cars market will disappear.