Alice is considering buying a security from Bob. There are two states of the world, L and H, which occur with equal probability. In the H state the security is worth £20 to Alice and £15 to Bob. In the L state the security is worth S pounds to both. Assuming that only Bob knows the state of the world,

A.Alice and Bob will be able to trade if S>10

B.Alice and Bob will never trade due to adverse selection

C.If S<10, trade can only occur in state H

D.Alice and Bob will never trade if S=15

Answer rating: 100% (QA)

ANSWER BAlice and Bob will never trade due to adverse selection Adverse selection in the insurance i... View the full answer