When a jeweler sells a low quality diamond to a young man who believes the diamond is the highest quality, she is engaging in
A)both moral hazard and adverse selection.
B)neither moral hazard nor adverse selection.
C)moral hazard, but not adverse selection.
D)adverse selection, but not moral hazard.

Question

Quizplus · Accepted Answer

The situation described in the question involves adverse selection, as the jeweler is aware that the diamond is of low quality but the young man is not. However, there is no indication of moral hazard as the jeweler is not taking any additional risks because of the transaction.

When a Jeweler Sells a Low Quality Diamond to a Young