Tami knows that people in her family die young,and so she buys life insurance.Preston knows he is a reckless driver and so he applies for automobile insurance.
A)These are both examples of adverse selection.
B)These are both examples of moral hazard.
C)The first example illustrates adverse selection,and the second illustrates moral hazard.
D)The first example illustrates moral hazard,and the second illustrates adverse selection.

Question

Quizplus · Accepted Answer

Tami knows that people in her family die young, and so she buys life insurance. This is an example of adverse selection because the insurance company does not know that Tami has a family history of dying young, and so they are more likely to charge her a higher premium than they would if they knew. Preston knows he is a reckless driver and so he applies for automobile insurance. This is also an example of adverse selection because the insurance company does not know that Preston is a reckless driver, and so they are more likely to charge him a higher premium than they would if they knew.

Tami Knows That People in Her Family Die Young,and So