Which of the following actions best illustrates adverse selection?

A) After Nalah purchases insurance, she has less incentive to be careful.
B) James knows he is a reckless driver and so he applies for automobile insurance.
C) Xavier dislikes losing $400 more than he likes winning $400.
D) A person is unwilling to buy a stock when she believes its price has an equal change of rising or falling $10.

Question

Katelyn DeLoye · Accepted Answer

Final Answer : B, Explanation :  Adverse selection occurs when one party in a transaction has more information than the other, typically in insurance or financial markets. In this case, James knows he is a reckless driver, which is information not known to the insurance company. This knowledge influences his decision to apply for automobile insurance, potentially leading to a higher risk for the insurance company.

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