Ashley opened an all-you-can-eat buffet restaurant. The price per-pers

Ashley opened an all-you-can-eat buffet restaurant. The price per-person was based on what Ashley believed an average restaurant patron would consume. The restaurant began to lose money.

Ashley concluded that her patrons had “above average” appetites, and were attracted to her restaurant because they could eat as much as they wanted while being charged an average price. A similar phenomenon exists in insurance markets. This problem is called
A) legal hazard.
B) adverse selection.
C) attitudinal hazard.
D) nondiversifiable risk.

ANSWER

Answer: B