the economics of money, banking, and financial markets

225 #

© 2014 Pearson Canada Inc.#

8.4 The Lemons Problem: How Adverse Selection Influences Financial Structure

1. 
   

   Bundling investors funds together ____.
   A) increases transactions costs per dollar of investment
   B) reduces transaction costs per dollar of investment
   C) increases moral hazard
   D) explains why stocks are the most import means of external financing for Canadian businesses
   Answer: A
   Diff: 1 Type: MC Page Ref: 164
   Skill: Recall
   Objective List: 8.1 Depict how asymmetric information results in adverse selection and moral
   hazard

   
   


2. 
   

   The "lemons problem" is a term used to describe the ____.
   A) moral hazard problem
   B) adverse selection problem
   C) free-rider problem
   D) the diversification problem
   Answer: B
   Diff: 1 Type: MC Page Ref: 165
   Skill: Recall
   Objective List: 8.1 Depict how asymmetric information results in adverse selection and moral
   hazard

   
   


3. 
   

   Because of the "lemons problem" the price a buyer of a used car pays is ____.
   A) equal to the price of a lemon
   B) less than the price of a lemon
   C) equal to the price of a peach
   D) between the price of a lemon and a peach
   Answer: D
   Diff: 1 Type: MC Page Ref: 165
   Skill: Recall
   Objective List: 8.1 Depict how asymmetric information results in adverse selection and moral
   hazard