Consider Mr.Ed,who purchases an insurance policy on a thoroughbred that he has acquired.He then proceeds to run the horse even though the horse has tendinitis.This is an example of:
A) an adverse-selection problem.
B) a moral-hazard problem.
C) coinsurance.
D) signaling.
E) all the above.

Question

Quizplus · Accepted Answer

Mr. Ed's behavior represents a moral hazard problem. Moral hazard refers to the idea that insurance can change the behavior of the insured, leading them to take risks they would not otherwise take because they are protected against the financial consequences of their actions. Despite knowing that the horse has tendinitis, Mr. Ed still decides to run the horse, which is a risky behavior that he might not have taken if he did not have insurance.