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Describe an adverse selection problem a company is facing. What is the source of the asymmetric information? Who is the less informed party? What transactions are not being consummated as a result of the information? Could you (or do you) use signaling or screening to consummate these transactions? Offer your company some sound advice, complete with computations of the attendant profit consequences. Adverse selection occurs when buyers and sellers have inequalities of information about a specific product in the market. In this case, either of the two parties has more information than the other. When the seller has more information than the buyer, the buyer may not buy the products due to the high risks. On the other hand, if the buyer has more information than the seller, the buyer may make it problematic to acquire the product using various strategies such as hiking of product prices and introducing a probational period for services. An example of an adverse selection is the scenario of the second-hand car company. The car seller knows more about the cars that have defects. In this case, the buyer has no idea about the defective nature of their purchase. The content knowledge that the buyer has over the seller is referred to as asymmetric information. Due to this data, the seller might be inclined to sell defective cars more than the better cars. On the other hand, the buyer may not purchase the car at that price since its risks are high.

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