In Situations Where There Is a Potential for Moral Hazard,the

question 57

Multiple Choice

In situations where there is a potential for moral hazard,the increased efficiency achieved through incentive schemes is:

• A) due to the reduction in resources that are dedicated to observing behavior.
• B) not certain, because incentive schemes can also create costs.
• C) easily achieved because incentive schemes are easy to design and yield predictable results.
• D) controversial because it usually comes at the expense of equity.

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Definitions:

Market Price

The actual selling price of a good or service in the marketplace at which buyers and sellers conduct transactions.

Total Revenue

The total income a firm receives from the sales of its products or services before any expenses are subtracted.

Economic Profit

The difference between a firm's total revenue and its opportunity costs, including both explicit and implicit costs.

Profit-maximizing

The process or strategy aiming to achieve the highest possible profit from business operations, often involving adjusting prices, output, and costs.