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:

Herbert Hoover

The 31st President of the United States (1929-1933), whose term was marked by the onset of the Great Depression.

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The national government of the United States, created by the Constitution, which divides powers between the executive, legislative, and judicial branches.

Big Business

Large-scale corporate enterprises characterized by significant market power, vast resources, and complex organizational structures.

American Way of Life

A phrase that refers to the lifestyle and cultural norms of people living in the United States, often emphasizing freedom, democracy, and economic opportunity.