Natalie Has an Auto Insurance Policy That Includes Both Collision

question 123

Multiple Choice

Natalie has an auto insurance policy that includes both collision and comprehensive coverage.She has a $500 deductible on her collision coverage and a $200 deductible on her comprehensive coverage.Her car has a book value of $7,000 when her car is damaged by a tornado.The car will cost $8,500 to repair.How much will Natalie's insurance company pay in this situation?

• A)$6,500
• B)$6,800
• C)$8,000
• D)$8,300

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Definitions:

Adverse Selection

Adverse selection is a phenomenon in economics and insurance where parties at a disadvantage due to asymmetric information are more likely to participate in an agreement or purchase, potentially leading to a market failure.

Asymmetric Information

A situation in which one party in a transaction has more or superior information compared to another, often leading to an imbalance in power or unfair advantages.

Adverse Selection

A situation in which one party in a transaction has more or better information than the other, often leading to a misallocation of resources.

Moral Hazard

A situation in economic theory where one party is willing to take more risks because the negative consequences of the risk will be borne by another party.