Which of the Following Best Describes How Moral Hazard Affects

question 24

Multiple Choice

Which of the following best describes how moral hazard affects the price of insurance?

• A)Since insurers can acquire complete information regarding the riskiness of borrowers,they can charge actuarially fair premiums.
• B)Since firms may have private information about how risky they are,insurers must raise premiums to compensate for the existence of this uncertainty.
• C)Since purchasing insurance reduces the firm's incentive to avoid risk,insurers must raise premiums to compensate for the increase in risk.
• D)Since purchasing insurance reduces the firm's risk,insurers can lower premiums to compensate for the reduction in risk.
• E)Since high premiums will drive away the low-risk firms,insurers must lower premiums in order to attract low-risk borrowers.

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Definitions:

Patents

Legal documents that grant inventors exclusive rights to their inventions, preventing others from making, using, or selling the invention without permission for a certain period.

Trademarks

Legal protections for symbols, names, and slogans used to identify goods or services and distinguish them from those of competitors.

Accrual Accounting

Accrual accounting is a method of accounting that records revenues and expenses when they are incurred, regardless of when cash is exchanged.

Recognizes Revenues

Recognizing revenues involves the accounting process of recording income when it is earned, which may not necessarily coincide with when payment is received.