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.

---

Definitions:

Operating Leverage

A measure of how revenue growth translates into growth in operating income, influenced by the proportion of fixed costs to variable costs.

Variable Costs

Expenses that vary in direct relation to the amount of output or sales.

Fixed Costs

Expenses that do not change with the level of output or sales, such as rent, salaries, and insurance, remaining constant regardless of business activity levels.

Margin of Safety

The difference between actual or anticipated sales and the sales level at the break-even point, measured to assess the risk of not covering fixed costs.