Adverse Selection May Lead to

question 96

Multiple Choice

Adverse selection may lead to

• A)owners of used cars choosing to keep them rather than sell them at the low price that skeptical buyers are willing to pay.
• B)wages being stuck above the level that balances supply and demand, resulting in unemployment.
• C)buyers with low risk choosing to remain uninsured because the policies they are offered fail to reflect their true characteristics.
• D)All of the above are correct.

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Definitions:

Income Elasticity

A measure of how much the demand for a product changes with a change in consumers' income.

Income Elasticity

A measure of how much the quantity demanded of a good responds to a change in consumers' income.

Inferior Good

A type of good whose demand decreases when consumer income rises, unlike normal goods for which the opposite is true.

Marginal Utility

The additional satisfaction or utility gained by consuming an additional unit of a good or service.