Which of the following is not correct?
A)An example of adverse selection is man who tries to sell his used car without disclosing that it needs a new transmission.
B)The "invisible hand" of a free market will always fix the problems of adverse selection and moral hazard.
C)An employer may try to prevent a moral hazard problem by paying her workers an efficiency wage.
D)One interpretation of gift giving is that it reflects asymmetric information and signaling.

Question

Quizplus · Accepted Answer

Although the "invisible hand" theory suggests that free markets can guide resources and prices to their most efficient equilibrium, it does not guarantee the elimination of adverse selection and moral hazard problems. Both adverse selection and moral hazard result from information asymmetry between two parties in a transaction, and without intervention or regulation, market participants may exploit such information asymmetry for their own benefit.

Which of the Following Is Not Correct