Which of the Following Best Demonstrates the Problem of Moral

question 40

Multiple Choice

Which of the following best demonstrates the problem of moral hazard?

• A) Josephine doesn't buy health insurance because it is too expensive and she is healthy.
• B) A life insurance company forces Sally to have a medical examination prior to selling her insurance.
• C) Sally drives more recklessly after she buys car insurance.
• D) Fatima chooses to attend a well-respected college.

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Definitions:

Cost of Capital

The rate of return that a company must earn on its projects to maintain its market value and attract investment.

M&M Proposition I

A theory in corporate finance that states the value of a firm is unaffected by how it is financed, in the absence of taxes, bankruptcy costs, and asymmetric information.

M&M Proposition II

A theory in corporate finance stating that a firm's cost of equity increases with its level of debt, considering there are no taxes, transaction costs, or bankruptcy costs.