Consider the following two situations. Irene accepts a job where she will be driving in dangerous traffic, so she seeks auto insurance. After Victor buys health insurance, he visits the gym less frequently. Which of these person's actions illustrates moral hazard?
A)Both Irene's and Victor's
B)Irene's but not Victor's
C)Victor's but not Irene's
D)Neither Victor's nor Irene's

Question

Quizplus · Accepted Answer

Moral hazard occurs when a person's behavior changes in a riskier way after they obtain insurance, because they feel less need to be cautious, knowing they are protected. Victor's behavior exemplifies this, as he exercises less caution (visits the gym less frequently) after buying health insurance. Irene's action of seeking insurance due to a risky job does not represent moral hazard; it's a response to existing risk, not a change in behavior due to the insurance.

Consider the Following Two Situations