Question

The problem of adverse selection:

A. occurs when sellers (who know more about the quality of what they are selling than buyers) deliberately select inferior products to sell.
B. is also referred to as the moral hazard problem.
C. can result in an overall increase in the gains from trade.
D. occurs when an employer fires the wrong person.
Jared has $12,000 to lend at an annual interest rate of 6%. Suppose at the end of one year, he reinvests the original $12,000 plus his interest earnings for a second year at the same rate of interest. How much money will he have at the end of two years?
A. $12,720.00
B. $12,982.00
C. $13,118.50
D. $13,483.20

Answer 1

Adverse selection can be seen in option A - that;s because the sellers have the information about the quality of all products

about Jared: At the end of the first year he would have:

12 000+ 6%*12000=12000+720=12720

After the second year, he would have 12720+12720+12720*6%=13483.2 - Answer D!

Answer 2

The problem of adverse selection:A. occurs when sellers (who know more about the quality of what they are selling than buyers) deliberately select inferior products to sell.

Given:
principal = 12,000
interest rate = 6%

Year 1 = 12,000 * 1.06 = 12,720
Year 2 = 12,720 * 1.06 = 13,483.20 Choice D.