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.

Understand the importance of only including relevant costs and benefits in project analysis.

Identify what constitutes an incremental cash flow for the purposes of capital budgeting.

Recognize that sunk costs and expenses not directly related to the project should not influence the project's cash flow analysis.

Recognize and calculate the impact of erosion when evaluating new projects.

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Definitions:

Time-Series Format

A sequence of data points collected or recorded at successive points in time, often used to analyze trends over time.

Reversal Design

A behavioral research methodology where an initial baseline condition is observed, an intervention implemented, and then withdrawn to observe changes in behavior or conditions, often followed by the reintroduction of the intervention.

Mechanisms of Change

Refers to the processes or pathways through which an intervention or action produces its effects.

Single Subject Designs

Research designs focusing on the response of a single participant or subject to controlled conditions or variables.