Question

The remedies for the adverse selection include all but the following. 1) free-riding O2) financial intermediation 3) government regulation 4) private production and sale of information Question 13 (1 point) Von Bora Corporation is expected pay a dividend of $1.40 per share at the end of this year and $1.50 per share at the end of the second year. You expect Von Bora's stock price to be $25.00 at the end of two years. Von Bora's equity cost of capital is 10%. Suppose you plan to hold Von Bora stock for only one year. Your capital gain from holding Von Bora stock for the first year is closest to: 1) $1.25 2) $1.40 3) $1.85 4) $0.95

Answer 1

1st) Answer: (1) free riding

Free riding is a type of market failure that occurs when those who benefit from resources, public goods, or services of a communal nature do not pay for them or under-pay.

Adverse selection is a market situation where buyers and sellers have different information, so that a participant might participate selectively in trades which benefit them the most, at the expense of the other trader. Points 2,3 and 4 are remedies of adverse selection but point 1, that is, free riding is itself a market failure and not a solution to adverse selection.