Lazy Lucy's parents decided that they would only pay her tuition if she passes all her classes.They would stop paying her tuition if she procrastinates and fails her courses.Lucy's parent's decision is a solution to a ________problem.
A)Adverse selection
B)Moral hazard
C)Forced bankruptcy
D)None of the above

Question

​Lazy Lucy's parents decided that they would only pay her tuition if she passes all her classes.They would stop paying her tuition if she procrastinates and fails her courses.Lucy's parent's decision is a solution to a ________problem.
A)​Adverse selection
B)Moral hazard
C)Forced bankruptcy
D)​None of the above

Quizplus · Accepted Answer

Lazy Lucy's parents are addressing the issue of moral hazard by creating a financial incentive for her to work hard and not procrastinate. Moral hazard refers to the problem of one party taking risks because they know someone else will bear the cost if things go wrong. In this case, Lucy might procrastinate and not put in effort if she knows her parents will pay her tuition regardless of her grades. By tying the payment of tuition to her grades, her parents are reducing the moral hazard problem.

​Lazy Lucy's Parents Decided That They Would Only Pay Her

Lazy Lucy's Parents Decided That They Would Only Pay Her