There is an adverse selection problem in the market for used cars because
A) owners of poor-quality cars have a strong incentive to sell their cars, while owners of high- quality used cars have more incentive to keep their cars.
B) owners of high-quality cars will have a strong incentive to sell their cars to obtain the higher prices, while owners of poor-quality cars will have more incentive to keep theirs.
C) most people prefer new cars, but the high prices for new cars force most of them to buy used cars.
D) government actions to pass "lemon" laws have reduced information on used cars.

Question

Quizplus · Accepted Answer

Owners of poor-quality cars are more likely to want to sell their cars quickly, which increases the proportion of poor-quality cars in the market. In contrast, owners of high-quality used cars are more likely to want to keep their cars or sell them at a higher price, which decreases the proportion of high-quality used cars available in the market. This leads to adverse selection, where buyers are more likely to end up with poor-quality used cars, even if they are willing to pay a fair price for a better car.

There Is an Adverse Selection Problem in the Market for Used