Your product fails about 2% of the time, on average. Some customers purchase the extended warranty you offer in which you will replace the product if it fails. Suppose that you have currently set the price of the extended warranty at 2% of the product price.

An analyst at your company argues that the types of customers who purchase the extended warranty are more likely to misuse and break the product. However, the analyst argues, the company cannot accurately identify these types of customers.

The analyst is claiming that ______ (Adverse Selection OR Moral Hazard?)will cause the claim rate to be ______ (higher or lower?)than 2%.

True or False: You should keep the price of the extended warranty at 2% of the product price.