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:

Test Statistic

A calculated value from sample data, used in statistical hypothesis testing to determine whether to reject the null hypothesis.

Random Samples

A subset of individuals chosen from a larger set, where each individual has an equal chance of being selected.

Rejected

In statistical analysis, refers to the decision to discard the null hypothesis based on the evidence from sample data and the predetermined significance level.

F-distribution

A continuous probability distribution that arises in the analysis of variances for comparing sample variances, used in ANOVA tests.