Which of the Following Best Illustrates Adverse Selection

question 146

Multiple Choice

Which of the following best illustrates adverse selection?

• A)A person adds risky stock to their portfolio.
• B)A person who has narrowly avoided many accidents applies for automobile insurance.
• C)A person is unwilling to buy a stock when she believes its price has an equal chance of rising or falling $10.
• D)A person gets homeowners insurance and then checks their smoke detector batteries less frequently.

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Definitions:

Marginal Utility Data

Information regarding the additional satisfaction or use received by consuming one more unit of a good or service.

Prices

The monetary value expected, necessary, or allocated for the purchase of something.

Utility-maximizing Combination

The selection of goods and/or services that provides the highest level of satisfaction to a consumer, given their budget constraint.

Marginal Utility

The additional utility or satisfaction gained from consuming one more unit of a good or service.