Question

BBB Auto Club provides emergency road service and other services to its members. BBB Auto Club charges a higher membership fee to new members than it charges to members who are renewing their membership. When asked to explain this pricing policy, the auto club president noted, "New members often sign-up prior to taking a long road trip, so we have to charge more as first-year members have higher service utilization rates." A similar phenomenon observed in insurance markets is called
A. attitudinal hazard.
B. adverse selection.
C. risk aversion.
D. moral hazard.

Answer 1

Answer: Adverse selection            

Explanation: In simple words, adverse selection refers to an insurance problem in which the buyer and seller of the insurance do not have same information. This occurs when the buyer deliberately hide some material facts from the insurance company.

In the given case, The company is charging more from new customers because they have perception that they take their services only when it is highly probable they have to use that.

Hence from the above we can conclude that the correct option is B.