An insurance company requires homeowners it insures to have smoke detectors in their homes. The insurance company is trying to combat the
A)adverse selection problem.
B)the free-rider effect.
C)moral hazard problem.
D)"lemons" problem.

Question

Quizplus · Accepted Answer

The requirement for smoke detectors is intended to combat the moral hazard problem, which arises when insured parties take greater risks because the cost of those risks is borne by the insurer, not by the insured. The requirement for smoke detectors reduces the likelihood that a fire will occur, thereby reducing the likelihood that the insurance company will have to pay out a claim.

An Insurance Company Requires Homeowners It Insures to Have Smoke