Adverse selection can occur when the:
A) I, II, and III
B) II
C) I and II
D) III

Question

Adverse selection can occur when the: 
A) I, II, and III 
B) II 
C) I and II 
D) III

Quizplus · Accepted Answer

Adverse selection can occur due to information asymmetry between the buyer and seller. In this case, (I) buyers have more information than sellers, which can lead to sellers offering lower quality products or setting higher prices based on the assumption that buyers are willing to pay more for better quality. Additionally, (II) adverse selection can occur when higher-risk individuals are more likely to buy insurance, leading to higher premiums and potentially causing lower-risk individuals to forgo coverage altogether. However, (III) moral hazard is not directly related to adverse selection, as it refers to the behavior of insured individuals changing after obtaining insurance rather than before.

Adverse Selection Can Occur When The