Multiple Choice
Which of the following descriptions best exemplifies adverse selection?
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17. Asymmetric Information, Voting, and Public Choice
Asymmetric Information: Adverse Selection and Moral Hazard
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In a market transaction characterized by asymmetric information, who is most likely to benefit from possessing confidential information?
A
The party with more information than the other
B
Neither party benefits from confidential information
C
Both parties equally
D
The party with less information than the other
Verified step by step guidance1
Understand the concept of asymmetric information: it occurs when one party in a transaction has more or better information than the other party.
Recognize that in such situations, the party with more information can make decisions that maximize their own benefit, often at the expense of the less informed party.
Analyze the options given: the party with more information, the party with less information, both parties equally, or neither party benefits.
Recall that economic theory and real-world examples show that the party with more information typically gains an advantage in negotiations or transactions.
Conclude that the party with more information than the other is most likely to benefit from possessing confidential information in a market transaction characterized by asymmetric information.
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