Answer to Question #270800 in Microeconomics for Anna

Question

Christopher purchased auto insurance for a new car. His insurance provides bumper-to-bumper coverage. Because of his type of insurance, Christopher will most likely _____. This behavior is because _____.

A. drive more cautiously than if he didn't have insurance; moral hazard

B. drive more cautiously than if he didn't have insurance; adverse selection

C. drive less cautiously than if he didn't have insurance; adverse selection

D. drive less cautiously than if he didn't have insurance; moral hazard

Answer 1

C.

• drive less cautiously than if he didn't have insurance; adverse selection

Adverse selection is when a buyer or seller uses their personal knowledge to maximize the outcome at the expense of the other party. In this case, Christopher knows that the insurance company will compensate him so he is likely to drive less cautiously and maximize his use of the car at the expense of the insurance company in case such an accident insured against occurs.