Each of the Following Is an Example of Moral Hazard

question 21

Multiple Choice

Each of the following is an example of moral hazard in which people modify their behavior in an opportunistic way,often frustrating the intent of governmental or management policies.Which is NOT an example of moral hazard?

• A) After a firm gets a loan from a bank to purchase inventory,the borrower instead decides to use it to invest in call options on stocks.
• B) Based on motorcycle accident data,a state passes a law requiring motorcyclists to wear helmet,but then the motorcyclist wearing helmets start to drive faster and more recklessly.
• C) Bank and nonbank mortgage lenders make money granting loans.But the Government through Freddie Mac and Fannie Mae decides to purchase these loans.The mortgage lenders find that they earn a fee for each mortgage that they grant and then sell to Freddie Mac or Fannie Mae.Since they never intended on holding on to the mortgage,the mortgage granters are not too particular on whether the customer can really pay it back.The lowest quality loans are sold to the Government.
• D) A fellow buys a $1 million life insurance policy and then travels to Nepal to climb Mount Everest.
• E) A student learns that if he or she reads the chapter and studies lecture notes,the student does better on the next test.

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Definitions:

Inefficient Rationing

A situation where goods or services are distributed or allocated in a way that does not maximize utility or welfare, often due to non-market forces such as regulations.

Policymakers

Individuals or groups responsible for making decisions and laws that affect a country's economy, society, and overall governance.

Market Outcomes

The results of the interactions between buyers and sellers in a market, including prices, quantities sold, and changes over time.

Ration Goods

Products that are distributed in limited quantities, often through a system of rationing, due to shortages or wartime conditions.