The tendency for low quality cars to drive high quality cars out of the used car market is an example…
The displacement of high-quality used cars by low-quality cars is adverse selection. Buyers cannot fully observe quality before purchase, so a price reflecting average…
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The tendency for low quality cars to drive high quality cars out of the used car market is an example of :
Answer and explanation
Correct answer B
The displacement of high-quality used cars by low-quality cars is adverse selection. Buyers cannot fully observe quality before purchase, so a price reflecting average quality can cause sellers of better cars to withdraw; moral hazard instead concerns behaviour after an agreement.
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Madhya Pradesh SET (MP SET)