An Insurance Company Is Likely to Attract Customers Like Clancy

question 323

Multiple Choice

An insurance company is likely to attract customers like Clancy who want to purchase insurance because he knows better that the company that he is more likely to make a claim on a policy. What is the term used to describe the situation above?

• A) moral hazard
• B) adverse selection
• C) asymmetric information
• D) economic irrationality

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Definitions:

Inventories

Assets held for sale in the ordinary course of business, or materials that will be used in the production of goods to be sold.

Year 2

Typically refers to the second year of a company's operations or performance being analyzed.

Variable Costing

An accounting method in which variable costs are charged to cost units and fixed costs are treated as period costs and directly charged to the profit and loss account.

Operating Income

The profit realized from a business's core operations, excluding deductions of interest and tax.