Suppose That a Publisher Is Considering How to Pay an Author

question 82

Multiple Choice

Suppose that a publisher is considering how to pay an author for writing a book. The publisher would like the author to put forth his maximum effort, but the publisher is unable to observe the author's effort. Paying a fixed fee for writing a book ____ an example of moral hazard because ____.

• A) is; the publisher will not be able to determine whether the author is lazy
• B) is; the publisher has more information than the author
• C) is not; the publisher will not be able to determine whether the author is lazy
• D) is not; the publisher has more information than the author

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Definitions:

Bank Loan

A sum of money borrowed from a bank that must be repaid with interest over a predetermined period.

Net Income

The total profit of a company after all expenses and taxes have been subtracted from revenue.

Revenues

The income generated from normal business operations, calculated by multiplying the price of goods or services by the quantity sold.

Dividends Payable

A liability account in a company's balance sheet indicating the amount in dividends that the company owes to its shareholders but has not yet paid out.