Scenario 17.3 Consider the Following Information

question 92

Multiple Choice

Scenario 17.3
Consider the following information:
The probability of a fire in a factory without a fire prevention program is 0.01. The probability of a fire in a factory with a fire protection program is 0.001. If a fire occurred, the value of the loss would be $300,000. A fire prevention program would cost $80 to run.
-Refer to Scenario 17.3. Moral hazard would be eliminated in this situation if:

• A) the insurer would always charge $300.
• B) the insurer would always charge $6000.
• C) the insurer could costlessly monitor whether a fire prevention program has been implemented, and adjust the premium upward if it is not.
• D) the insurer could costlessly monitor whether a fire prevention program has been implemented, and adjust the premium downward if it is not.
• E) the fire did not occur.

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Definitions:

Roth IRA

An individual retirement account allowing investors to pay taxes on money going into the account and then make tax-free withdrawals in retirement.

Traditional IRA

A type of retirement account that allows individuals to make pre-tax contributions, with the investments growing tax-deferred until withdrawals begin.

Wage Insurance

A form of financial protection that provides workers with a portion of their earnings difference if they lose their job and find a new one at a lower wage.

Moral Hazard

A situation in which one party is more likely to take risks because they do not bear the full consequences of their actions, often due to asymmetric information or where one party is protected in some way from the risks they take.