As it applies to insurance, the adverse selection problem is the tendency for Question 8 options:...

As it applies to insurance, the adverse selection problem is the tendency for

Question 8 options:

1)	those most likely to collect on insurance to buy it.

2)	those who buy insurance to take less precaution in avoiding the insured risk.

3)	sellers to price discriminate.

4)	sellers to restrict output and charge high prices.

Solutions

Expert Solution

Option 1.

As it applies to insurance, the adverse selection problem is the tendency for those most likely to collect on insurance to buy it.
Adverse selection refers to a situation in which different market participants are said to have different Information's regarding a particular aspect which makes them take wrong decisions and eventually suffer losses.
Adverse selection seems to have originated from insurance companies where the insurers face this problem due to the lack of relevant information.
They provide insurance coverage to those people whose actual risk seems to exceed the risk they thought they knew. This leads to the problem of adverse selection as they have to cover the cost of providing the insurance coverage to those who are more risk prone than other's.

Rahul Sunny answered 1 year ago

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