Scenario 17.4 Consider the Following Information

question 77

Multiple Choice

Scenario 17.4
Consider the following information:
StowUrStuff Storage is located slightly below sea level in a coastal town. It could build and maintain a flood control system around its property at an annual cost of $1000, and if it did so, the probability of a flood's doing $1,000,000 in damage during the year would be .005. With no flood control system, the probability of such a flood would be .01.
-Refer to Scenario 17.4. Moral hazard would be eliminated in this situation if:

• A) the insurer would always charge $5000.
• B) the insurer would always charge $10,000.
• C) the insurer could costlessly monitor whether a flood control system is in place, and adjust the premium upward if it is not.
• D) the insurer could costlessly monitor whether a flood control system is in place, and adjust the premium downward if it is not.
• E) the flood did not occur.

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Definitions:

Separately Stated

Items on a partnership or S corporation tax return that must be reported separately on the owners' personal tax returns.

Taxable Dividend

A dividend paid to shareholders that is subject to income taxation.

Corporate Earnings And Profits

The measure of a corporation's ability to generate income over its costs and expenses within a specific period.

Return Of Capital

A payment to investors that returns some of their original investment, thus reducing the investor's cost basis in the investment.