Which of the following is a result of adverse selection?

• A. Insured individuals take greater risks because they are protected from losses.
• B. High-risk individuals are more likely to purchase insurance than low-risk individuals.
• C. Firms increase wages to attract more qualified workers.
• D. Consumers have perfect information about product quality.

Answer: (B)

Verified step by step guidance

1. Understand the concept of adverse selection: it occurs when one party in a transaction has more or better information than the other, leading to a selection of undesirable outcomes.
2. Identify the context: adverse selection is commonly discussed in insurance markets, where individuals know their own risk level better than insurers.
3. Analyze each option in relation to adverse selection:
4. - 'Insured individuals take greater risks because they are protected from losses' describes moral hazard, not adverse selection.
5. - 'High-risk individuals are more likely to purchase insurance than low-risk individuals' matches the definition of adverse selection, as those with higher risk self-select into insurance.
6. - 'Firms increase wages to attract more qualified workers' relates to signaling or screening, not adverse selection.
7. - 'Consumers have perfect information about product quality' contradicts the information asymmetry that causes adverse selection.