Suppose a new startup in Davis wants to offer bicycle insurance to students and it goes like this: Students pay a fixed yearly premium for bicycle insurance. If students are in a bicycle accident that is not their fault, the startup will pay to fix the students' bicycle, or, if the bicycle is totaled, to replace the bicycle with one of equal value. If students are in a bicycle accident and it is their fault, the startup will not owe them anything.

7.1 Explain moral hazard in this setting.
7.2 What are three factors that determine the level of moral hazard in this setting?
7.3 What are two possible things that the bicycle insurance company could do to decrease moral hazard and to increased      production efficiency in this setting?