BBB Auto Club provides emergency road service and other services to it

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

Answer: B