Question

Some racing horse breeders keep a few of their foals and sell the others. Generally, they put the poorest quality foals up for sale early in the season. Buyers have limited information about the foals up for sale, but they know that the first foals from some breeders will not be good racers. Other breeders sell all their foals. Since buyers cannot know which breeders are keeping back their good foals, they are suspicious of all foals offered for sale early in the season, lowering the sale prices. Breeders who sell all their foals are therefore forced to hold back their better foals until later in the season, to get true market prices for them. The market for foals is therefore subject to thea. adverse selection problemb. moral hazard problemc. free-rider effectd. none of the above

Answer 1

Answer: the correct answer is a. adverse selection problem

Explanation:

Adverse selection is when sellers have information that purchasers do not have, or vice versa, about some aspect of product quality. It is thus the tendency of those in dangerous jobs or high-risk lifestyles to purchase life or disability insurance where chances are greater they will collect on it.