In each of the following pairs, which situation (1) or (2) would pose the largest problems...

In each of the following pairs, which situation (1) or (2) would pose the largest problems regarding adverse selection?

a. A policy covering accidents for all children attending YMCA camps or (2) A policy covering accidents for college students traveling abroad

b. Basic medical services insurance package offered to students entering college or (2) Basic medical services package offered to professors seeking early retirement

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Expert Solution

Ans.

Adverse selection is also known as hidden information where one party hides the information from other parties.

a. (2) A policy covering accidents for college students travelling abroad.

This would pose largest problem regarding adverse selection as college students may give false information regarding cost of medicines or hospital. Or can inform false accident to get to get money from the policy. Whereas policy covering for children is not an adverse selection problem because YMCA camps usually provide full safety where there is less chance of false information.

b.(2) Basic medical services package offered to professors seeking early retirement.

The basic medical services provided to students entering college will pose adverse selection problem compared to professors because sellers of insurance will charge higher prices from students. As the professors will be less engaged in risky behaviors with there health compared to youth. So students will be charged more than professors. Which shows hidden information from buyers of the insurance.

Rahul Sunny answered 1 year ago

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