Which of the Following Is an Example of Adverse Selection

question 159

Multiple Choice

Which of the following is an example of adverse selection?

• A)The odds of a fire rise after a building is insured because the person with fire insurance is likely to pay less attention to fire hazards.
• B)Someone who did not install fire alarms and a sprinkler system in a building he owns buys insurance for the building.
• C)Someone with automobile insurance drives more recklessly than someone without insurance.
• D)People prefer to buy new cars rather than used cars.

Understand the principles and calculations involved in financial decision-making regarding equipment replacement and trade-ins.

Analyze the impact of replacing existing equipment on variable manufacturing costs and overall income.

Determine the most profitable sales mix for a company based on production capacity, selling prices, and variable costs.

Calculate markup percentages and price determination based on total costs.

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Definitions:

Option Expiration

The date on which an options contract becomes void and the holder no longer has rights for which it provides.

Shares

Units of ownership interest in a corporation or financial asset that provide for an equal distribution in any profits, if any are declared, in the form of dividends.

Strike Price

The predetermined price at which an option can be exercised, allowing the holder to buy (in the case of a call option) or sell (in the case of a put option) the underlying security.

Puts

Options contracts giving the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time.