David sees a classified ad offering a used digital camera for $5. On the opposit

Question

David sees a classified ad offering a used digital camera for $5. On the opposite page, he sees a big color ad from a national electronics chain offering a new digital camera for $50. David values a digital camera at $75 so long as it works, regardless of whether it is new or used. Suppose David buys the new digital camera from the national electronics chain, thinking, "Someone would ask $5 for a used digital camera only if it didn't work well.* This reasoning reflects concerns that the market may be characterized by which principle? The free-rider problem Adverse selection Government failure Moral hazard Suppose Madeline, the seller of the digital camera, knows the camera works well-she is only selling it because she got a better model as a gift. She thinks about asking $20 and offering a guarantee: She will replace the digital camera with a new $50 digital camera if it turns out not to work. Then she thinks, 'That's not a good idea! Someone can just buy it, handle it carelessly, and If it breaks they can pretend it didn't work and get a new digital camera for $20-meanwhile, I'll be out $30!' Madeline's line of reasoning regarding her potential buyer concerns related to which principle? The free-rider problem Adverse selection Moral hazard Government failure Why is Madeline unable to sell David the digital camera? Check all that apply. Moral hazard can prevent sellers from offering guarantees of quality because they can't be sore that buyers won't try to take advantage of the guarantees by Ming false claims. Adverse selection can cause buyers to avoid purchasing high-quality goods because of the uncertainty about their quality.

Explanation / Answer

Adverse selection Moral hazard Both apply.

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