Which of the following is an example of adverse selection?
A)employees shirking because they believe they can get away with reduced work
B)a traveller who is prone to forgetting her bags purchasing full-comprehensive travel insurance
C)a well-informed IT expert purchasing a new laptop
D)a petrol station displaying its prices alongside a busy highway

Question

Quizplus · Accepted Answer

Adverse selection refers to a situation where one party has information that the other party does not have, which results in a transaction that is unfavorable to the party without information. In this case, the traveller prone to forgetting her bags has more information about her likelihood of losing her bags, and therefore is more likely to purchase comprehensive travel insurance. This results in the insurance company having a higher risk of paying out claims, which could lead to higher insurance premiums for all customers.

Which of the Following Is an Example of Adverse Selection