Question

1. Because Elaine has a family history of significant
medical problems, she buys health insurance, whereas
her friend Jerry, who has a healthier family, goes
without. This is an example of
a. moral hazard.
b. adverse selection.
c. signaling
d. screening

Answer 1

Answer:

(b) Adverse Selection

Explanation:

Elaine, the buyer of the health insurance knows more about her health problems than the insurance company. The price of health insurance reflects the costs of an unhealthier person than an average person. So, Jerry who is healthy may observe the high price of insurance and decide not to buy it.