Question

Some sellers of used cars provide warranties to buyers, with the aim of reassuring buyers that the car is of good quality. These warranties help reduce the chance of what occurring?

A. Negative externalities.B. Adverse selection.C. Spillover benefits.D. Moral hazard.

Answer 1

Adverse selection

Explanation:

Adverse selection typically refers to such a circumstance when sellers possess knowledge that customers just don't have, about some type of quality of products — in other terms, it is a method of leveraging asymmetric data.

In other words, Asymmetric information, often referred to as intelligence loss, occurs when any group has better knowledge of data than any of the other group.

Thus, we can conclude that the warranty is given to ensure customers that nothing has been hidden from them.