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

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The example with Sally illustrates adverse selection because she is aware of her health risks, which are not obvious to the insurance company. This means that she is more likely to buy health insurance than someone with lower health risks, leading to adverse selection. The example with Edward illustrates moral hazard because he is less careful about his actions after buying homeowners insurance, knowing that if a fire were to occur, he is covered. This creates a moral hazard where Edward is more prone to risky behavior because he is insured. Therefore, answer C illustrates both adverse selection and moral hazard.

Sally Buys Health Insurance Because She Knows That She Has