Moral hazard occurs if one party to a transaction takes actions that the trading partner ________ and that ________ the benefits the trading partner receives from the trade.
A) observes; affect
B) observes; do not affect
C) cannot observe; affect
D) cannot observe; do not affect

Question

Quizplus · Accepted Answer

Moral hazard occurs when one party takes actions that the other party cannot observe and those actions affect the benefits received by that party. Option C correctly identifies this relationship between observation and impact on benefits. The other options either incorrectly state that observation is necessary or assume that actions do not affect benefits, which is not true in the case of moral hazard.

Moral Hazard Occurs If One Party to a Transaction Takes