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 example illustrates the potential for :
A) risk pooling.
B) risk aversion.
C) adverse selection.
D) diversification.

Question

Quizplus · Accepted Answer

This scenario illustrates adverse selection, where Matty, who is more likely to need insurance due to his poor driving, seeks out and purchases more insurance than Rudy, who considers himself a low-risk driver and only purchases the minimum required insurance. This results in an uneven distribution of risk among policyholders.

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