John has been a sky diver for many years.When the company John works for offers its employees the option to purchase a life insurance policy,John purchases a policy.This illustrates the problem of
A)moral hazard.
B)adverse selection.
C)risk-return tradeoff.
D)diversification.

Question

Quizplus · Accepted Answer

John's decision to purchase a life insurance policy when it is offered implies that he may be a higher risk individual than others in the company. This is an example of adverse selection, where those individuals who are at a higher risk are more likely to purchase insurance, leading to an imbalance in the risk pool. Moral hazard refers to the situation where individuals change their behavior because of the presence of insurance, while risk-return tradeoff and diversification are concepts related to portfolio management and not applicable to this scenario.

John Has Been a Sky Diver for Many Years