When people or firms that are worse than average risks are most likely to enter a contract that is offered to everyone, the problem is called
A)irrational expectations.
B)adverse selection.
C)opportunity cost.
D)moral hazard.

Question

Quizplus · Accepted Answer

Adverse selection occurs when those who are more likely to engage in risky behavior are the ones who are most likely to enter into contracts, such as insurance policies or investment agreements, which can lead to higher costs or losses for the other party. This is often seen in the insurance industry, where individuals with high-risk factors (such as poor health) are more likely to purchase insurance, and thus, insurers must charge higher premiums to cover the expected costs of claims.

When People or Firms That Are Worse Than Average Risks