Which of the following is an example of moral hazard ?
Correct answer: A. After Gull buys fire insurance, he begins to smoke cigarettes in bed.
- A. After Gull buys fire insurance, he begins to smoke cigarettes in bed.
- B. None of these answers demonstrate moral hazard
- C. Mahmood has been feeling poorly lately so he seeks health insurance
- D. All of these answers demonstrate moral hazard
Explanation
Moral hazard occurs when insurance changes behaviour after coverage is obtained, as Gull's insured status encourages riskier smoking behaviour. Mahmood's decision to seek insurance because he already feels ill is adverse selection, which occurs before coverage.
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