1.Life insurance companies usually charge a higher premium to smokers than non-smokers. Given this, what is the potential for adverse selection and moral hazard in the process of new applicants? How can the company reduce or eliminate those problems?

2. Most credit cards charge a relatively high rate of interest, yet low-risk borrowers carry them. The adverse selection concept says that low-risk borrowers should be discouraged from credit cards. Why is this not the case?

3.Your friend maintains a very high balance on her credit card. She's also missed a few payments but thinks its not a big deal and the only cost is a little extra interest added to the balance. You know that it will cost her a lot more. Explain how her handling of this debt can impact what she pays on future debt.