Why do people often tend to take risks if they are insured?
What will be an ideal response?
People often tend to take risks if they are insured because they do not have to bear the costs if anything goes wrong. Such behavior is called moral hazard. It happens when one party in a transaction takes actions based on his or her private information that is unavailable to the other party but affects its payoff.
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How does the concept of utility of wealth capture the idea that pain of loss exceeds the pleasure of gain?
What will be an ideal response?
When a teacher in a private school points out to her high school principal that since there are empty seats in all classrooms, the cost of additional students is really zero, she is using the
a. law of comparative advantage. b. principle of marginal analysis. c. theory of externalities. d. notion of the cost decreases of the service sector. e. concept of opportunity cost.