Question

Suppose Cho comes into a large sum of money and decides to lend it out to

Answer 1

Answer:

C. Adverse selection.

Explanation:

Adverse selection occurs when the participants in a economic transaction do not have the same amount of information about each other: either the buyer has more information than the seller, or the seller has more information than the buyer.

In the question, we have an example of adverse selection because Cho does not have enough information about the buyers (the borrowers), and she does not have a good way to obtain that information.

For that reason, she decides to give the money to the bank, an institution with much more capacity and information about the borrowers. Like this, she is solving the problem of adverse selection.