Which of the Following Actions Best Illustrates Adverse Selection

question 32

Multiple Choice

Which of the following actions best illustrates adverse selection?

• A)A person purposely chooses bonds of corporations with high default risk because of the high returns.
• B)A person dislikes losing $400 more than he likes winning $400.
• C)After obtaining automobile insurance a person drives less carefully than before.
• D)A person intending to take up dangerous hobbies applies for life insurance.

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Definitions:

Agent

A party who has the authority to act on behalf of and bind another party.

Third-Party Beneficiary

A person who is not directly involved in a contract but is entitled to benefits from its performance by the contracting parties.

Gratuitous Agent

An agent who acts without being paid for his or her services.

Consideration

The bargained-for exchange; what each party gets in exchange for his or her promise under a contract.