Whether a ship owner attempting to insure an old vessel for twice its current market value is an adverse selection or a moral hazard issue Introduction: Moral hazard is a phenomenon where a party to a contract has an incentive to alter behaviour in a way which makes the contract less appealing to the other party.

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Answer 1

Question

Chapter 21, Problem 1PS

Summary Introduction

To determine:

Whether a ship owner attempting to insure an old vessel for twice its current market value is an adverse selection or a moral hazard issue

Introduction:

Moral hazard is a phenomenon where a party to a contract has an incentive to alter behaviour in a way which makes the contract less appealing to the other party.

Expert Solution & Answer

Answer to Problem 1PS

This is a problem related to moral hazard.

Explanation of Solution

Given Information:

Ship owner has attempted to insure an old vessel for twice its current value. Moral hazard is the reason why such act if insuring items for more than its market value or intrinsic value is prohibited as it creates an incentive.

The given problem is a case of moral hazard as the ship owner insures an old vessel for double its current market value. Now the ship owner now has an rational motive to create a loss and to file a claim later on. The issue of adverse selection will crop up only when due to improper information the buyer or the seller will choose a bad product or service. Such improper or undiagnosed information, if known earlier could prevent the transaction from occurring.

Considering this, the major difference between moral hazard and adverse selection is of movement. One party movement is beyond control once the deal occurred. Generally, a moral hazard is seen in case of insurance transactions.

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4. On August 20, Mr. and Mrs. Cleaver decided to buy a property from Mr. and Mrs. Ward for $105,000. On August 30, Mr. and Mrs. Cleaver obtained a loan commitment from OKAY National Bank for an $84,000 conventional loan at 5 percent for 30 years. The lender informs Mr. and Mrs. Cleaver that a $2,100 loan origination fee will be required to obtain the loan. The loan closing is to take place September 22. In addition, escrow accounts will be required for all prorated property taxes and hazard insurance; however, no mortgage insurance is necessary. The buyer will also pay a full year's premium for hazard insurance to Rock of Gibraltar Insurance Company. A breakdown of expected settlement costs, provided by OKAY National Bank when Mr. and Mrs. Cleaver inspect the uniform settlement statement as required under RESPA on September 21, is as follows: I. Transactions between buyer-borrower and third parties: a. Recording fees--mortgage b. Real estate transfer tax c. Recording fees/document…

Answer 2

Question

Chapter 21, Problem 1PS

Summary Introduction

To determine:

Whether a ship owner attempting to insure an old vessel for twice its current market value is an adverse selection or a moral hazard issue

Introduction:

Moral hazard is a phenomenon where a party to a contract has an incentive to alter behaviour in a way which makes the contract less appealing to the other party.

Expert Solution & Answer

Answer to Problem 1PS

This is a problem related to moral hazard.

Explanation of Solution

Given Information:

Ship owner has attempted to insure an old vessel for twice its current value. Moral hazard is the reason why such act if insuring items for more than its market value or intrinsic value is prohibited as it creates an incentive.

The given problem is a case of moral hazard as the ship owner insures an old vessel for double its current market value. Now the ship owner now has an rational motive to create a loss and to file a claim later on. The issue of adverse selection will crop up only when due to improper information the buyer or the seller will choose a bad product or service. Such improper or undiagnosed information, if known earlier could prevent the transaction from occurring.

Considering this, the major difference between moral hazard and adverse selection is of movement. One party movement is beyond control once the deal occurred. Generally, a moral hazard is seen in case of insurance transactions.

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Answer 3

Question

Chapter 21, Problem 1PS

Summary Introduction

To determine:

Whether a ship owner attempting to insure an old vessel for twice its current market value is an adverse selection or a moral hazard issue

Introduction:

Moral hazard is a phenomenon where a party to a contract has an incentive to alter behaviour in a way which makes the contract less appealing to the other party.

Expert Solution & Answer

Answer to Problem 1PS

This is a problem related to moral hazard.

Explanation of Solution

Given Information:

Ship owner has attempted to insure an old vessel for twice its current value. Moral hazard is the reason why such act if insuring items for more than its market value or intrinsic value is prohibited as it creates an incentive.

The given problem is a case of moral hazard as the ship owner insures an old vessel for double its current market value. Now the ship owner now has an rational motive to create a loss and to file a claim later on. The issue of adverse selection will crop up only when due to improper information the buyer or the seller will choose a bad product or service. Such improper or undiagnosed information, if known earlier could prevent the transaction from occurring.

Considering this, the major difference between moral hazard and adverse selection is of movement. One party movement is beyond control once the deal occurred. Generally, a moral hazard is seen in case of insurance transactions.

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Answer 4

Question

Chapter 21, Problem 1PS

Summary Introduction

To determine:

Whether a ship owner attempting to insure an old vessel for twice its current market value is an adverse selection or a moral hazard issue

Introduction:

Moral hazard is a phenomenon where a party to a contract has an incentive to alter behaviour in a way which makes the contract less appealing to the other party.

Expert Solution & Answer

Answer to Problem 1PS

This is a problem related to moral hazard.

Explanation of Solution

Given Information:

Ship owner has attempted to insure an old vessel for twice its current value. Moral hazard is the reason why such act if insuring items for more than its market value or intrinsic value is prohibited as it creates an incentive.

The given problem is a case of moral hazard as the ship owner insures an old vessel for double its current market value. Now the ship owner now has an rational motive to create a loss and to file a claim later on. The issue of adverse selection will crop up only when due to improper information the buyer or the seller will choose a bad product or service. Such improper or undiagnosed information, if known earlier could prevent the transaction from occurring.

Considering this, the major difference between moral hazard and adverse selection is of movement. One party movement is beyond control once the deal occurred. Generally, a moral hazard is seen in case of insurance transactions.

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Answer 5

Chapter 21, Problem 1PS

Summary Introduction

To determine:

Whether a ship owner attempting to insure an old vessel for twice its current market value is an adverse selection or a moral hazard issue

Introduction:

Moral hazard is a phenomenon where a party to a contract has an incentive to alter behaviour in a way which makes the contract less appealing to the other party.

Expert Solution & Answer

Answer to Problem 1PS

This is a problem related to moral hazard.

Explanation of Solution

Given Information:

Ship owner has attempted to insure an old vessel for twice its current value. Moral hazard is the reason why such act if insuring items for more than its market value or intrinsic value is prohibited as it creates an incentive.

The given problem is a case of moral hazard as the ship owner insures an old vessel for double its current market value. Now the ship owner now has an rational motive to create a loss and to file a claim later on. The issue of adverse selection will crop up only when due to improper information the buyer or the seller will choose a bad product or service. Such improper or undiagnosed information, if known earlier could prevent the transaction from occurring.

Considering this, the major difference between moral hazard and adverse selection is of movement. One party movement is beyond control once the deal occurred. Generally, a moral hazard is seen in case of insurance transactions.

Answer 6

Chapter 21, Problem 1PS

Summary Introduction

To determine:

Whether a ship owner attempting to insure an old vessel for twice its current market value is an adverse selection or a moral hazard issue

Introduction:

Moral hazard is a phenomenon where a party to a contract has an incentive to alter behaviour in a way which makes the contract less appealing to the other party.

Expert Solution & Answer

Answer to Problem 1PS

This is a problem related to moral hazard.

Explanation of Solution

Given Information:

Ship owner has attempted to insure an old vessel for twice its current value. Moral hazard is the reason why such act if insuring items for more than its market value or intrinsic value is prohibited as it creates an incentive.

The given problem is a case of moral hazard as the ship owner insures an old vessel for double its current market value. Now the ship owner now has an rational motive to create a loss and to file a claim later on. The issue of adverse selection will crop up only when due to improper information the buyer or the seller will choose a bad product or service. Such improper or undiagnosed information, if known earlier could prevent the transaction from occurring.

Considering this, the major difference between moral hazard and adverse selection is of movement. One party movement is beyond control once the deal occurred. Generally, a moral hazard is seen in case of insurance transactions.

Answer 7

Chapter 21, Problem 1PS

Summary Introduction

To determine:

Whether a ship owner attempting to insure an old vessel for twice its current market value is an adverse selection or a moral hazard issue

Introduction:

Moral hazard is a phenomenon where a party to a contract has an incentive to alter behaviour in a way which makes the contract less appealing to the other party.

Answer 8

Expert Solution & Answer

Answer to Problem 1PS

This is a problem related to moral hazard.

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Explanation of Solution

Given Information:

Ship owner has attempted to insure an old vessel for twice its current value. Moral hazard is the reason why such act if insuring items for more than its market value or intrinsic value is prohibited as it creates an incentive.

The given problem is a case of moral hazard as the ship owner insures an old vessel for double its current market value. Now the ship owner now has an rational motive to create a loss and to file a claim later on. The issue of adverse selection will crop up only when due to improper information the buyer or the seller will choose a bad product or service. Such improper or undiagnosed information, if known earlier could prevent the transaction from occurring.

Considering this, the major difference between moral hazard and adverse selection is of movement. One party movement is beyond control once the deal occurred. Generally, a moral hazard is seen in case of insurance transactions.

Answer 12

Ch. 21 - Prob. 1PS Ch. 21 - 2. The same ship owner advertises a tariff whereby...Ch. 21 - Prob. 3PS Ch. 21 - Prob. 4PS Ch. 21 - Prob. 5PS Ch. 21 - Prob. 6PS Ch. 21 - With a 3inflation rate (Spreadsheet 21.2), by how...Ch. 21 - Prob. 8PS Ch. 21 - Prob. 9PS Ch. 21 - Prob. 10PS

Concept explainers

Answer to Problem 1PS

Explanation of Solution

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