Firms compensate top executives with options to buy company

Firms compensate top executives with options to buy company stock at a given price in the future.\" How does the action described reduce the problem of moral hazard? O This provides an incentive for the executives to work hard to increase the value of the firm. O This ensures the firm\'s owners would share the profits with the executives if they work hard.

Solution

1) Ans) This provides an incentives for executives to work hard to increase the value of the firm.

Reason- As the company stock value is dependent on performance of company and executives will work hard so make the performance good.

2)Ans) False

Reason- As the yearly premium is increased now so healthy people will look out for other substitues or policies with less prmium and quit from this policy

3) Ans) Less

Reason- As unhealthy people will continue to take this policy as he doesnt need to pay any additional charges if they wish to extend policy whereas if they opt for substitutes it will be costlier for them.

4)Ans) True

Reason- As their will be more unhealthy people holding the policy and the company might have to pay the claims in case of any medical expenses so the overall profit might not occur , hence their is uncertainity regarding the profits.