Under which of the following situations might the problem of adverse selection occur?
A)Transaction costs are low.
B)Information is costlessly communicated.
C)The individuals have heterogeneous probabilities of actual losses.
D)Individuals are homogeneous in their attitude toward risk.

Question

Quizplus · Accepted Answer

Adverse selection occurs when one party has more information than the other party and uses it to their advantage, leading to a selection of poor quality goods or services. In this case, heterogeneous probabilities of actual losses mean that some individuals are more likely to suffer losses than others, leading to potential adverse selection issues. Other options, such as low transaction costs and homogeneous attitudes toward risk, do not necessarily lead to adverse selection problems.

Under Which of the Following Situations Might the Problem of Adverse