Sally buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company.Edward buys home owners insurance and then is less careful to make sure he's put out his cigarettes.The example with Sally
A)and the example with Edward illustrate adverse selection.
B)and the example with Sally illustrate moral hazard.
C)best illustrates adverse selection, the example with Edward best illustrates moral hazard.
D)best illustrates moral hazard, the example with Edward best illustrates adverse selection.

Question

Quizplus · Accepted Answer

Sally's situation is an example of adverse selection because she has private information about her health risks that the insurance company does not know. Edward's situation is an example of moral hazard because after obtaining insurance, he becomes less careful, increasing the risk of a claim.

Sally Buys Health Insurance Because She Knows That She Has