Which of the Following Best Describes How Adverse Selection Affects

question 100

Multiple Choice

Which of the following best describes how adverse selection affects the price of insurance?

• A)Since insurers can acquire complete information regarding the riskiness of borrowers,they can charge actuarially fair premiums.
• B)Since firms may have private information about how risky they are,insurers must raise premiums to compensate for the existence of this uncertainty.
• C)Since purchasing insurance reduces the firm's incentive to avoid risk,insurers must raise premiums to compensate for the increase in risk.
• D)Since purchasing insurance reduces the firm's risk,insurers can lower premiums to compensate for the reduction in risk.
• E)Since high premiums will drive away the low-risk firms,insurers must lower premiums in order to attract low-risk borrowers.

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Definitions:

Decision-Making

The process of making choices among alternative possible courses of action.

Referent Power

Influence based on the leader's personal traits, where followers identify with or want to emulate the leader.

Coercive Power

A form of authority that relies on the use of threats, punishment, or negative reinforcements to influence others' behavior or compliance.

Legitimate Power

A form of authority derived from a position of power within an organization, granting the ability to make decisions, command resources, and enforce obedience.