Adverse selection in insurance markets occurs because:

The correct answer to the question "Adverse selection in insurance markets occurs because:" is Option B: High-risk individuals are more likely to seek insurance, raising costs and potentially driving low-risk individuals out.

The other options — A) All customers are equal risk, C) Insurance companies charge too little, D) Government mandates coverage — are incorrect for this Pre-MBA Exam Prep question. As explained above: Adverse selection: information asymmetry before transaction. High-risk buyers more likely to purchase insurance → pool worsens → premiums rise → low-risk drop out → death spiral. Solutions: mandatory…