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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Students have asked these similar questions

Pam and Jim are saving money for their two children who they plan to send to university.The eldest child will enter university in 5 years while the younger will enter in 7 years. Each child is expected spend four years at university. University fees are currently R20 000 per year and are expected to grow at 5% per year. These fees are paid at the beginning of each year.Pam and Jim currently have R40 000 in their savings and their plan is to save a fixed amount each year for the next 5 years. The first deposit taking place at the end of the current year and the last deposit at the date the first university fees are paid.Pam and Jim expect to earn 10% per year on their investments.What amount should they invest each year to meet the cost of their children’s university fees?

You make a loan of R100 000, with annual payments being made at the end of each year for the next 5 years at a 10% interest rate. How much interest is paid in the second year?

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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