If the insurance company offers the insurance for $1,500, then the theory of adverse selection predicts that
Suppose that Dirk and Rollergirl are both considering purchasing insurance.
Dirk's "expected loss" is equal to $1,600.
Rollergirl's expected loss is equal to $1,200.
Also, both Dirk and Rollergirl are "risk averse," and so each of them is willing to buy insurance for an amount that's up to $200 in excess of his/her expected loss.
A. both of them will agree to purchase the insurance.
B. dirk will purchase the insurance, but Rollergirl will decide that it's too expensive.
C. neither one of them will agree to purchase the insurance.
D. both of them will agree to purchase the insurance, but the insurance company will still lose money regardless.
Answer: Dirk will purchase the insurance, but Rollergirl will decide that it's too expensive.
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