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3 July, 12:56

What is the following scenario an example of? Tom often calls 911 from the drive-through lane of a fast food restaurant if his order comes out wrong. A. public choice theory B. utility theory C. moral hazard D. law of diminishing marginal utility

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  1. 3 July, 15:19
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    The correct answer is C. moral hazard.

    Explanation:

    Moral hazard corresponds to opportunistic behavior in which one of the parties seeks their own benefit at the cost of the other being unable to observe or be informed of their conduct.

    Moral hazard appears in the markets with asymmetric information. One party has private information about their conduct while others cannot obtain this information.

    Given this asymmetry, individuals take greater risks, make less effort or take advantage of certain circumstances since they know that the cost of their actions will fall on other people.
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