In the used car market,adverse selection creates the lemon problem when
A) sellers cannot judge buyers' creditworthiness.
B) buyers believe that sellers will offer only high-priced "good" used cars for sale.
C) buyers believe that sellers will sell only lemons.
D) sellers offer warranties on all used cars.
E) None of the above answers is correct because it is moral hazard that creates the lemon problem.

Question

Quizplus · Accepted Answer

Adverse selection creates the lemon problem when buyers believe that sellers will sell only lemons, meaning inferior quality used cars. This happens because buyers cannot assess the true quality of the car before purchasing it, whereas sellers have asymmetric information about the car's true condition. Buyers may be willing to pay a premium price for a good used car, but sellers may try to take advantage of this by hiding information about the car's defects and selling lemons instead.

In the Used Car Market,adverse Selection Creates the Lemon Problem