(Scenario: Used-Car Market) Use Scenario: Used-Car Market.Adverse selection in this used-car market occurs because of: Scenario: Used-Car Market
In the used-car market,cars of poor quality are called lemons,while cars of good quality are called plums.Suppose that the probability of obtaining a lemon is 60% and the probability of obtaining a plum is 40%.Also,assume that a plum is worth $15,000 and a lemon is worth $3,000.

A) asymmetric information.
B) risk-loving behavior.
C) moral hazard.
D) diversification.

Adverse Selection

A situation in markets where buyers or sellers have information that other participants do not have, leading to an inefficient transaction outcome.

Asymmetric Information

A situation in which one party in a transaction has more or superior information compared to another.

Lemons

In economics, refers to a lower-quality product that is difficult to distinguish from higher-quality products before purchase, notably used in a market context where there is information asymmetry between buyers and sellers.