Insurance companies are not permitted to require AIDS tests as a precondition for coverage,so they do not know whether or not the people they insure have already contracted HIV (the virus that causes AIDS).This situation is an example of
A) signaling.
B) adverse selection.
C) the principal-agent problem.
D) moral hazard.

Question

Quizplus · Accepted Answer

The situation described is an example of adverse selection because insurance companies do not have complete information about the health status of individuals they insure, which can lead to a higher proportion of high-risk individuals in the pool of insureds.

Insurance Companies Are Not Permitted to Require AIDS Tests as a Precondition