Which of the following is the best example of adverse selection?
A)People who face the highest risks are the people most likely to buy insurance against these risks.
B)The residual claimant will have to bear the consequences of the most adverse outcomes.
C)An individual can influence the probability that she has an accident.
D)Items in the most popular styles sell out the quickest.
E)People sometimes mistakenly choose low-quality products.

Question

Quizplus · Accepted Answer

Adverse selection refers to the situation where one party in a transaction has better information than the other party, leading to an inefficient outcome. In this example, people with higher risks are more likely to purchase insurance, which means that only the high-risk individuals are in the market. The insurance company is then forced to charge a higher premium, which results in low-risk individuals being priced out of the market. This is an example of adverse selection because the low-risk individuals are effectively self-selecting out of the market, and the insurance company is left with a pool of high-risk customers who are more likely to file claims.

Which of the Following Is the Best Example of Adverse