Question

A borrower who takes out a loan usually has better information about the potential returns and risk of the investment projects he plans to undertake than does the lender. This inequality of information is called:______
a) inasymmertric information,
b) adverse selection,
c) noncollaterlized risk,
d) moral hazard

Answer 1

Answer:

B) adverse selection

Explanation:

Asymmetric information refers to a situation where there exists an information failure. In business, asymmetric information can result in two types of information failures:

1. adverse selection: when one of the parties, either the buyer of the seller (or the borrower and the lender), possesses information that the other party doesn't.
2. moral hazard: happens when a party in a contract tends to take greater risks because he/she knows that any cost resulting from those actions will be covered by the other party.

Answer 2

Answer:

a) asymmertric information

Explanation:

Based on the information provided within the question it can be said that this inequality of information is called Asymmetric information. Like mentioned int he question this term refers to when one party of a contract or business transaction has greater material knowledge regarding the transaction than the opposite party. Such as knowing the potential returns and risk of the investment projects when borrowing money.

** answer A is not inasymmetric but asymmetric**