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Scenario: Used Car Market
In the used car market, cars of poor quality are called lemons, while cars of good quality are plums. Suppose the probability of obtaining a lemon is 60% and the probability of obtaining a plum is 40%. Also assume a plum is worth $15,000 and a lemon is worth $3,000.
-(Scenario: Used Car Market) Look at the scenario Used Car Market. Adverse selection in this used car market occurs because of:
A) asymmetric information.
B) risk-loving behavior.
C) moral hazard.
D) diversification.

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Quizplus · Accepted Answer

Adverse selection occurs due to asymmetric information, where sellers have more information about the quality of the car than buyers, leading to a market where lemons are more likely to be sold than plums.

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