Which of the Following Best Illustrates the Adverse Selection Problem

question 64

Multiple Choice

Which of the following best illustrates the adverse selection problem?

• A)a professional football team that consistently drafts poor players
• B)an economic agent who engages in risky behavior once a loan is received
• C)an individual who hides a pre-existing condition from a health insurer
• D)an individual who experiences a lost of income by not working while attending college

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Definitions:

Treasury Bill

Short-term government security issued at a discount from the face value and mature in a year or less, representing a safe investment.

Common Stock

A type of share or equity ownership in a company, giving holders voting rights and a share in the company's profits via dividends.

Securities Exchange Act

A U.S. law enacted in 1934, which governs the trading of securities, such as stocks and bonds, to protect investors and maintain fair and efficient markets.

Preliminary Prospectus

An initial document given to investors that outlines important details of a potential investment, including risks, objectives, and terms.