Question:
Suppose high quality and low quality products are sold at the same price to the buyers. The buyers have less information to determine the quality of the product compared to the sellers at the time of purchase. Which of the following problems arises in this situation?
Suppose high quality and low quality products are sold at the same price to the buyers. The buyers have less information to determine the quality of the product compared to the sellers at the time of purchase. Which of the following problems arises in this situation?
Updated On: Feb 10, 2025
- Moral hazard problem
- Market signaling problem
- Principal-agent problem
- Adverse selection problem
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The Correct Option is D
Solution and Explanation
Adverse selection arises due to information asymmetry where buyers cannot differentiate between high and low quality, leading to potential market failure as good quality products are driven out.
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