Adverse Selection Is Said to Exist When an Individual

question 21

Multiple Choice

Adverse selection is said to exist when an individual

• A)selects a product which has adverse externalities.
• B)is not able to take advantage of another individual.
• C)purchases a lot of insurance because he/she knows that he/she is at high risk.
• D)has the incentive to,and is able to,shift costs to another individual.
• E)is averse to certain products.

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Definitions:

Predetermined Overhead Rate

An estimated charge per unit of activity used to allocate manufacturing overhead costs to products, calculated before the accounting period begins.

Machine-Hours

Machine-hours represent a measure of production time, indicating the number of hours that machinery is in operation during a certain period.

Machining Department

A section within a manufacturing facility where materials are cut, shaped, and finished into parts using machines and tools.

Finishing Department

A stage in manufacturing where products undergo final processes such as polishing, painting, or packaging before being ready for sale.