As the largest employer in a small town, I may be more likely to take business r
ID: 1211783 • Letter: A
Question
As the largest employer in a small town, I may be more likely to take business risks because, if the company struggles, I might expect the local government to provide financial assistance. This situation reflects which of the following?
a principal-agent problem that becomes a moral hazard problem
a moral hazard problem
a principal-agent problem
an adverse selection problem
e. a moral hazard problem that becomes an adverse selection problem
a.a principal-agent problem that becomes a moral hazard problem
b.a moral hazard problem
c.a principal-agent problem
d.an adverse selection problem
e.e. a moral hazard problem that becomes an adverse selection problem
Explanation / Answer
Ans: a moral hazard problem
Explanation: Moral hazard is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost. It arises when both the parties have incomplete information about each other.