Question

7) An example of the ________ problem would be if Brian borrowed money from Sean in order to purchase a used car and instead took a trip to Atlantic City using those funds.

Answer 1

Answer:

The answer options for this question are as follows

A) moral hazard

B) adverse selection

C) costly state verification

D) agency

The correct answer is A) moral hazard

Explanation:

Moral hazard corresponds to opportunistic behavior where one of the parties seeks their own benefit at the expense of the other being unable to observe or be informed of their behavior.

Moral hazard appears in markets with asymmetric information. One of the parties has private information about their conduct while others cannot obtain this information.

Given this asymmetry, individuals take greater risks, make less efforts or take advantage of certain circumstances because they know that the cost of their actions will fall on other people.