Using the concept of information asymmetry, answer the following questions:

a. You observe that used cars sold by new car dealers sell for a higher price, for models of same make, year, and condition, than used cars sold by used car dealers. Why?

b. Why would a fire insurance policy contain a $1,500 deductible provision?

c. Why would a life insurance company require a medical examination before approving applications for new policies?

d. A firm plans to raise additional capital by means of a new issue of common shares. Before doing so, it hires a well-known investment house to help design and market the issue, and also switches auditors from a small, local firm to a "Big Four" firm. Why? (CGA-Canada)