Jen has a family history of medical problems, which leads her to purchase health insurance. Her friend, Mark, has a healthier family, decides not to buy health insurance. This is an example of:

• A. Moral hazard
• B. Adverse selection
• C. Signaling
• D. Screening

Answer: (B)

Verified step by step guidance

1. Identify the key terms in the problem: 'family history of medical problems', 'purchase health insurance', and 'decides not to buy health insurance'.
2. Understand the concept of adverse selection: It occurs when one party in a transaction has more information than the other, typically leading to a situation where those most likely to make a claim are the ones who purchase insurance.
3. Relate the concept to the scenario: Jen, who has a family history of medical problems, is more likely to need health insurance and thus purchases it. Mark, with a healthier family, opts out, indicating that Jen has more information about her health risks than the insurer.
4. Differentiate from other concepts: Moral hazard involves changes in behavior after a transaction, signaling is about conveying information to the other party, and screening is about the insurer trying to gather more information.
5. Conclude that this scenario is an example of adverse selection, as it involves asymmetric information leading to a skewed insurance pool.