Discussion:
1. What term best describes the payment which must be offered to a risk-averse individual to willingly accept a gamble?
a. Certainty equivalent
b. Risk equivalent
c. Certainty payment
2. Which of the following terms best describes a contract that guarantees an agent some payment, but provides enough incentive so that the agent does not shirk?
a. Variability reduction contract
b. Risk-sharing contract
c.Risk premium contract
3. Which of the following terms describes a phenomenon whereby individuals ignore their own information about the best course of action and instead simply do what everyone else is doing?
a. Pay-for-performance
b. Herding
c. Risk sharing