Question

Elasticity of demand curve 1 = - 0.5

Elasticity of demand curve 2 = - 2.5

Elasticity of demand curve 3 = - 0.2

Which of the following provides the greatest moral hazard potential?

Group of answer choices

all provides identical levels of moral hazard

D2

D3

D1

Answer 1

Elasticity of demand will have a negative number as it shows a negative relationship between price and quantity demanded.

Elasticity of demand curve 1 = - 0.5 = 0.5

Elasticity of demand curve 2 = - 2.5 = 2.5

Elasticity of demand curve 3 = - 0.2 = 0.2

Elasticity of demand greater than 1 shows that product is elastic which goods can be compensated if price rises while elasticity of demand less than 1 shows that good is inelastic which cannot be compensated even if price rises.

Moral hazard occurs in case of insurance company when they lack incentive to take care of their health as insurance company will bear the cost in case of any mishappening.

Consumers first consume inelastic goods as they seems to be necessary goods while elastic goods are luxury goods. As moral hazard in insurance oocurs when consumer consmes fast food which is a elastic good. Thus we can say that moral hazard rises as elasticity rises.

Thsu Elasticity of demand curve 2 have highest moral hazard problem.