Which of the following represent examples of adverse selection?
A) Unhealthy people are more likely to want health insurance.
B) Careless drivers purchasing extra auto insurance.
C) Risk averse individuals choosing to buy extra insurance.
D) all of the above
E) A and B only

Question

Quizplus · Accepted Answer

Adverse selection refers to the situation where one party has more information than the other party, leading to an imbalance in the market. Option A represents adverse selection because unhealthy people have more information about their health condition and are more likely to want health insurance, which creates a selection bias. Option B also represents adverse selection because careless drivers have more information about their driving history and are more likely to want extra auto insurance. Option C, however, does not represent adverse selection because risk averse individuals do not have any more information than other buyers in the market. Therefore, the best answer is E, representing options A and B only.

Which of the Following Represent Examples of Adverse Selection