Rhonda would like a better bicycle,and she considers selling her old one by advertising on the bulletin board in the student center.She decides against it because the used bicycles listed on the board are underpriced.This example illustrates the problem of:

A) adverse selection.
B) moral hazard.
C) positive correlation.
D) risk aversion.

Question

jayla thomas · Accepted Answer

Final Answer : A, Explanation :  Adverse selection refers to a situation where buyers or sellers have access to information that the other party does not, resulting in an unfair advantage. In this case, Rhonda realizes that the used bicycles listed on the bulletin board are underpriced, meaning that sellers likely have information about the quality or condition of their bicycles that is not available to buyers. This creates a situation where Rhonda may not be able to sell her bicycle for a fair price, as buyers will likely assume that it is of lower quality than it is.

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