Abby buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company.Brad buys home owners insurance and then is less careful to make sure he's put out his cigarettes.The example with Abby
A)and the example with Brad illustrate adverse selection.
B)and the example with Brad illustrate moral hazard.
C)illustrates adverse selection;the example with Brad illustrates moral hazard.
D)illustrates moral hazard;the example with Brad illustrates adverse selection.

Question

Quizplus · Accepted Answer

Abby's decision to buy health insurance even though she has health risks that are not obvious to the insurance company is an example of adverse selection. This is because she has private information (her health risks) that the insurance company is not aware of, but she is using that information to her advantage in buying insurance. 
On the other hand, Brad buying home owner's insurance and being less careful about putting out his cigarettes is an example of moral hazard. This is because he has insurance, so he may take riskier behavior as he knows he is protected by his insurance policy.

Abby Buys Health Insurance Because She Knows That She Has