Scenario 17.3 Consider the Following Information

question 1

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 arises in this situation because once the firm:

• A) pays the premium that is based on the 0.001 probability, it has no incentive to spend the additional $80 for the fire protection program, so the true probability of loss is no longer 0.001.
• B) pays the premium that is based on the 0.01 probability, it has no incentive to spend the additional $80 for the fire protection program, so the true probability of loss is no longer 0.01.
• C) puts the fire protection program in place, it has less incentive to spend $300 for a premium, leaving the firm underinsured.
• D) puts the fire protection program in place, it has less incentive to spend $6,000 for a premium, leaving the firm underinsured.
• E) puts the fire protection program in place, it will consider that a substitute for insurance and not be able to deal with the loss from a fire should it occur.

---

Definitions:

Inferential Statistics

A branch of statistics that allows for making predictions or inferences about a population based on a sample of data.

Population of Interest

The specific group of individuals, about whom researchers want to draw conclusions, within the scope of a given study or analysis.

Respirations

Respirations refer to the act of breathing, wherein air is inhaled and exhaled from the lungs.

Defense Mechanisms

Psychological strategies used unconsciously by individuals to protect themselves from anxiety and to manage emotional conflict and external stressors.