Adverse selection in an insurance market occurs when:
Correct answer: A. Higher-risk people are more likely to seek coverage
- A. Higher-risk people are more likely to seek coverage
- B. Insured people take greater risks after coverage begins
- C. Insurers reduce premiums after every claim
- D. Low-risk people always receive more compensation
Explanation
Adverse selection arises before an agreement, when people with higher expected losses are more likely to purchase insurance. Taking greater risks after obtaining insurance is moral hazard, not adverse selection.
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Individual consumers, firms and markets are examined through demand and supply, elasticity, consumer choice, production, costs, revenue and the determination of prices and output. The topic also covers market structures such as perfect competition, monopoly and oligopoly, plus market failure, externalities and the distinction between microeconomic decisions and economy-wide outcomes.
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