A lender faces a(n) ________ problem if borrowers with a greater chance of defaulting on their loans get loans from the lender.
A) adverse selection
B) moral hazard
C) external cost
D) free‐rider

Question

Quizplus · Accepted Answer

Adverse selection occurs when there is asymmetric information between buyers and sellers, leading to the potential for those with a higher risk of defaulting on loans to be more likely to seek and obtain loans. This is because the lender cannot accurately assess the risk of each borrower.

A Lender Faces A(n) ________ Problem If Borrowers with a Greater