A credit union faces a(n) ________ problem when it lends funds to a customer to remodel her home and the customer then opportunistically uses the funds for a gambling trip to Las Vegas.
A) adverse selection
B) moral hazard
C) external cost
D) free-rider

Question

Quizplus · Accepted Answer

Moral hazard occurs when one party in a transaction takes on more risk because they know that someone else will bear the cost of those risks. In this case, after receiving the loan under the pretense of remodeling a home, the customer uses the funds for a different, riskier purpose (gambling), knowing that the credit union bears the financial risk.

A Credit Union Faces A(n) ________ Problem When It Lends