The Fact That Someone with a High Risk of Medical

question 20

Multiple Choice

The fact that someone with a high risk of medical problems is more likely to buy a lot of health insurance is an example of

• A) adverse selection.
• B) monitoring.
• C) moral hazard.
• D) an optimal contract.

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Definitions:

Probabilities

A measure representing the likelihood or chance of certain events occurring, expressed as a number between 0 and 1.

Uncertainty

A lack of definite knowledge or predictability about outcomes, often factored into decision-making and risk assessments.

Present Value Index

An index computed by dividing the total present value of the net cash flow to be received from a proposed capital investment by the amount to be invested.

Net Present Value

The difference between the present value of cash inflows and the present value of cash outflows over a period of time, used in capital budgeting to assess the profitability of investments.