-Refer to Figure 14.1.If the price of insurance is $7,500,then
A) 50% of the consumers will be high-cost.
B) 25% of the consumers will be low-cost.
C) 75% of the consumers will be high-cost.
D) 100% of the consumers will be high-cost.

Question

-Refer to Figure 14.1.If the price of insurance is $7,500,then
A) 50% of the consumers will be high-cost. 
B) 25% of the consumers will be low-cost. 
C) 75% of the consumers will be high-cost. 
D) 100% of the consumers will be high-cost.

Quizplus · Accepted Answer

At a price of $7,500, only high-cost consumers will buy insurance because the price exceeds the value of insurance to low-cost consumers ($5,000), leading to adverse selection where only the high-cost consumers (who value insurance at $10,000) participate.