Asked by Bui Huyen Trang (K13_HN) on Jun 03, 2024
Verified
Lazy Lucy's parents decided that they would only pay her tuition if she passes all her classes.They would stop paying her tuition if she procrastinates and fails her courses.Lucy's parent's decision is a solution to a ________problem.
A) Adverse selection
B) Moral hazard
C) Forced bankruptcy
D) None of the above
Moral Hazard
a situation in which an individual or entity is more likely to take risks because they won't bear the full consequences of their actions, often due to asymmetric information or insurance.
Tuition
The fee charged for instruction or education, often by a college or university.
- Comprehend how incentives and surveillance can reduce the risk of moral hazard.
Verified Answer
SP
shavonda payneJun 09, 2024
Final Answer :
B
Explanation :
Lazy Lucy's parents are addressing the issue of moral hazard by creating a financial incentive for her to work hard and not procrastinate. Moral hazard refers to the problem of one party taking risks because they know someone else will bear the cost if things go wrong. In this case, Lucy might procrastinate and not put in effort if she knows her parents will pay her tuition regardless of her grades. By tying the payment of tuition to her grades, her parents are reducing the moral hazard problem.
Learning Objectives
- Comprehend how incentives and surveillance can reduce the risk of moral hazard.
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