Which of the following is an example of moral hazard?

Question

a. After Joe buys fire insurance, he begins to smoke cigarettes in bed.
b. Doug has been feeling poorly lately so he seeks health insurance.
c. Both of Susan's parents lost their teeth due to gum disease, so Susan buys dental insurance.
d. All of the above demonstrate moral hazard.
e. None of the above demonstrates moral hazard.

Answer 1

The correct answer is: a. After Joe buys fire insurance, he begins to smoke cigarettes in bed.

Moral hazard occurs when an individual has an incentive to take risks because they do not bear the full consequences of those risks, often due to insurance or protection. In this case, Joe's behavior of smoking in bed after obtaining fire insurance illustrates moral hazard because he is taking a risk that he might not have taken if he did not have insurance to cover potential damages.

The other options (b and c) do not represent moral hazard as they do not involve risk-increasing behavior after obtaining insurance. Hence, the answer is not "d" or "e".