Asked by Kevin Chaffins on May 21, 2024
Verified
Which of the following actions best illustrates moral hazard?
A) Hannah knows she is a reckless driver and so she applies for automobile insurance.
B) A person is unwilling to buy a stock when she believes its price has an equal change of rising or falling $10.
C) Morgan dislikes losing $400 more than he likes winning $400.
D) When you rent a car, you treat it with less care than you would if it were your own.
Moral Hazard
The situation where one party in a transaction has the opportunity to take risks because they know the other party will bear the costs.
- Understand the principles of moral hazard and adverse selection in financial markets.
Verified Answer
SA
Shannon AndrewsMay 25, 2024
Final Answer :
D
Explanation :
Moral hazard occurs when a person takes more risks because they know they are protected, as in the case of treating a rented car with less care because the consequences of damage are less personally significant.
Learning Objectives
- Understand the principles of moral hazard and adverse selection in financial markets.
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