Question

Ashley opened an all-you-can-eat buffet restaurant. The cost per-person was based upon 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. moral hazard.
B. adverse selection.
C. morale hazard.
D. fundamental risk.

Answer 1

Answer:

B. adverse selection.

Explanation:

Because, the restaurant price is a flat fee the person which find this attractive are those who eat above average.

Liek a life insurance per life will be taken with people who's life expectancy is above average, the same occrus here.

People who eat less than average will have less incentive to go

while above average move incentive thus, the "real" average including the adverse selection qualms should be more higher than the average across all consumers.