Upon buying a car with airbags, Indy begins to drive recklessly. This is an example of the

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Quizplus · Accepted Answer

The moral hazard problem arises when an individual takes more risks or engages in reckless behavior due to the protection of insurance or safety measures, such as airbags in this case. Indy's reckless driving behavior after buying a car with airbags is an example of moral hazard. The principal-agent problem is a situation where an agent (such as an employee) may act in their own interest rather than the best interest of the principal (such as the employer). Adverse selection refers to the phenomenon where individuals with higher-risk activities are more likely to purchase insurance than those with lower-risk activities, leading to higher premiums for everyone. The free-rider problem is a situation where individuals benefit from a public good without paying for it, such as enjoying a park without contributing to its maintenance. None of the other options accurately describe Indy's behavior in this scenario.

Upon Buying a Car with Airbags, Indy Begins to Drive