Matty and Rudy are the same age,live in the same town,and hold similar jobs a similar distance from their respective homes.They are so similar,in fact,that to the insurance company,they look the same and are offered the same insurance options.However,Matty has never been a particularly good driver and so buys a lot of auto insurance.Rudy,on the other hand,takes pride in being an excellent driver and so only carries the minimum insurance required.This is an example of:
A)adverse selection.
B)risk pooling.
C)risk aversion.
D)diversification.

Question

Quizplus · Accepted Answer

This scenario is an example of adverse selection, where the individual with the higher risk (Matty) opts for more insurance coverage, while the individual with a lower risk (Rudy) opts for less coverage. This can lead to imbalanced risk pooling and higher premiums for everyone in the risk pool.

Matty and Rudy Are the Same Age,live in the Same