What is adverse selection? Give an example and explain why it is ...

[go.lag]

What is adverse selection? Give an example and explain why it is a problem.
 
  What will be an ideal response?

Question 2

Refer to Table 4-4. Suppose that the quantity of labor demanded increases by 40,000 at each wage level. What are the new free market equilibrium hourly wage and the new equilibrium quantity of labor?
 
  A) W = 8.00; Q = 390,000 B) W = 9.50; Q = 380,000
  C) W = 10.00; Q = 390,000 D) W = 8.50; Q = 380,000

[Zebsrer]

Answer to Question 1

Adverse selection can occur when a buyer or seller enters into an exchange with another party who has more information. In the case of health insurance people who know they are sick are more inclined to seek coverage and to withhold their condition from the insurance company. If insurance companies could identify these individuals they would charge them higher premiums.

Answer to Question 2

C