Bob is planning to sell his home. In preparation for the sale, he paints all of the ceilings in his house to cover up water stains from his leaking roof so that potential buyers will be unaware of this problem. This is an example of
A)moral hazard.
B)screening.
C)adverse selection.
D)the principal-agent problem.

Question

Quizplus · Accepted Answer

Adverse selection occurs when one party in a transaction has more information than the other, leading to an imbalance. In this case, Bob is hiding information about the roof's condition from potential buyers, which is a classic example of adverse selection.

Bob Is Planning to Sell His Home