Use the following setup for question
Both Nadia and Samantha are applying to insure their car against theft.Nadia lives in a secure neighborhood,where the probability of theft is 10%.Samantha lives in a lesser secure neighborhood where the probability of theft is 25%.Both Nadia and Samantha own cars worth $10,000,and are willing to pay $100 over expected loss for insurance.
-If the insurance company can correctly anticipate the adverse selection,
A)Only Samantha would buy insurance
B)Only Nadia would buy the insurance
C)Both of them would buy the insurance
D)Neither of them would buy the insurance

Question

​Use the following setup for question
Both Nadia and Samantha are applying to insure their car against theft.Nadia lives in a secure neighborhood,where the probability of theft is 10%.Samantha lives in a lesser secure neighborhood where the probability of theft is 25%.Both Nadia and Samantha own cars worth $10,000,and are willing to pay $100 over expected loss for insurance.
-​If the insurance company can correctly anticipate the adverse selection,
A)​Only Samantha would buy insurance
B)Only Nadia would buy the insurance
C)Both of them would buy the insurance
D)​Neither of them would buy the insurance

Quizplus · Accepted Answer

Samantha's expected loss is higher due to the higher probability of theft, making her more likely to find the insurance worth the cost.

​Use the Following Setup for Question

Use the Following Setup for Question