Multiple Choice
In a market transaction characterized by asymmetric information, which of the following is most likely to occur?
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17. Asymmetric Information, Voting, and Public Choice
Asymmetric Information: Adverse Selection and Moral Hazard
Multiple Choice
Which of the following is a result of adverse selection?
A
Insured individuals take greater risks because they are protected from losses.
B
High-risk individuals are more likely to purchase insurance than low-risk individuals.
C
Firms increase wages to attract more qualified workers.
D
Consumers have perfect information about product quality.
Verified step by step guidance1
Understand the concept of adverse selection: it occurs when one party in a transaction has more or better information than the other, leading to a selection of undesirable outcomes.
Identify the context: adverse selection is commonly discussed in insurance markets, where individuals know their own risk level better than insurers.
Analyze each option in relation to adverse selection:
- 'Insured individuals take greater risks because they are protected from losses' describes moral hazard, not adverse selection.
- 'High-risk individuals are more likely to purchase insurance than low-risk individuals' matches the definition of adverse selection, as those with higher risk self-select into insurance.
- 'Firms increase wages to attract more qualified workers' relates to signaling or screening, not adverse selection.
- 'Consumers have perfect information about product quality' contradicts the information asymmetry that causes adverse selection.
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