Question

LUP UC ar uperUUUn tutu u TCU w cusure till you are loureying on the text or you motes. If you encounter any technical problems while taking the test, please contact the help desk immediately. Question 1 2 pts A firm lets its workers choose a specific amount of benefit money toward certain insurance. Michael has six kids who need glasses, so he selects the family vision coverage. This is an example of the O moral hazard problem. Ofree-rider problem. adverse selection problem. O principal-agent problem,

Answer 1

Answer : Moral Hazard Problem

Explanation to understand the answer above :

Moral Hazard Problem :Moral hazard is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost. It arises when both the parties have incomplete information about each other. This economic concept is known as moral hazard. Moral Hazard is the concept that individuals have incentives to alter their behavior when their risk or bad-decision making is borne by others. Examples of moral hazard include: Comprehensive insurance policies decrease the incentive to take care of your possessions.

Free rider problem :The free rider problem is an issue in economics. It is considered an example of a market failure. That is, it is an inefficient distribution of goods or services that occurs when some individuals are allowed to consume more than their fair share of the shared resource or pay less than their fair share of the costs. Eg: If someone builds a lighthouse, all sailors will benefit from its illumination – even if they don't pay towards its upkeep.

Adverse selection problem : Adverse selection refers to a situation where sellers have more information than buyers have, or vice versa, about some aspect of product quality. Adverse selection in the insurance industry involves an applicant gaining insurance at a cost that is below their true level of risk. A smoker getting insurance as a non-smoker is an example of insurance adverse selection.

The principal agent problem : The principal-agent problem is a conflict in priorities between a person or group and the representative authorized to act on their behalf. An agent may act in a way that is contrary to the best interests of the principal. The Principal Agent Problem occurs when one person (the agent) is allowed to make decisions on behalf of another person (the principal). In this situation, there are issues of moral hazard and conflicts of interest.Politicians (the agents) and voters (the principals) is an example of the Principal Agent Problem