Risk Assessment(50 points)Directions Use the case study t.docx

Risk Assessment
(50 points)
Directions: Use the case study to provide answers to the
following questions.
Case Study: “Illness Associated with Drift of Chloropicrin Soil
Fumigant into a Residential Area—Kern County, California,
2003,” located on p. 154 of the textbook
Issue Identification
What is causing the identified problem?
Why is the problem a problem?
How was the problem initially identified?
What are the public perceptions of the hazard?
Hazard Identification
What types of adverse health effects might be caused by the
problem?
How quickly and for what duration might the problem be
experienced?
Dose Response Assessment
Evaluate both qualitative and quantitative toxicity information
to estimate the incidence of adverse effects occurring in humans
at different exposure levels.
Exposure Assessment for the Relevant Population
Determine the frequency, magnitude, extent, duration, and
character of exposures to the hazard.
Risk Characterization
Detail the nature and potential incidence of effects for the
exposure conditions described in the exposure assessment.
© 2011. Grand Canyon University. All Rights Reserved.

WEEK 9 ASSIGNMENT
Dealing with Risk, Asymmetric Information, and Incentives
INTRODUCTION
Choice of a company
Continue research on Southwest Airlines, or
Select another company, or
Select the company you work for
Size of paper
Six to eight (6–8) pages
QUESTION 1
Evaluate a company’s recent (within the last year) actions
dealing with risk and uncertainty. (10 %)
Difference between risk and uncertainty
Risk is how we characterize uncertainty about values that vary.
Risk is modeled using random variables multiplied by their
probabilities.
Uncertainty refers to the distribution of the random variables.
Which probabilities should be assigned to the various values the
random variables can take?
QUESTION 1
Evaluate a company’s recent (within the last year) actions
dealing with risk and uncertainty. (10 %)
When you’re uncertain about the costs or beneﬁts of a decision,
replace numbers with random variables and compute expected
costs and benefits.
Analyze common types of uncertainty and risk your company

faces. For example:
Uncertainty in pricing
Uncertainty in dealing with suppliers and distributers
…
QUESTION 2
Offer advice for improving risk management. (15 %)
By modeling uncertainty, you can:
Learn to make better decisions
Identify the source(s) of risk in a decisions
Compute the value of collecting more information.
Difference-in-difference estimators are a good way to gather
information about the beneﬁts and costs of a decision.
The ﬁrst difference is before versus after the decision or event.
The second difference is the difference between a control and
an experimental group.
If you are facing a decision in which one of your alternatives
would work well in one state of the world, and you are
uncertain about which state of the world you are in, think about
how to minimize expected error costs.
QUESTION 2
Offer advice for improving risk management. (15 %)
Uncertainty is unavoidable. To cope with uncertainty, gather
more or better information.
Best Buy has used dispersed sets of non-experts to predict
future variables, such as a holiday sales rate.
Google uses internal prediction markets to generate demand and
usage forecasting.
The US Marines advise:

Because we can never eliminate uncertainty, we must learn to
fight effectively despite it. We can do this by developing
simple, flexible plans; planning for likely contingencies;
developing standing operating procedures; and fostering
initiative among subordinates.
QUESTION 3
Examine an adverse selection problem your company is facing
and recommend how it should minimize its negative impact on
transactions. (15 %)
Define adverse selection
Adverse selection is a problem that arises from information
asymmetry—anticipate it, and, if you can, ﬁgure out how to
consummate the unconsummated wealth-creating transaction
(for example, how to make low-risk customers pay for health
insurance).
Screening is an uninformed party’s effort to learn the
information that the more informed party has.
Signaling is an informed party’s effort to communicate her
information to the less informed party.
QUESTION 3
Examine an adverse selection problem your company is facing
and recommend how it should minimize its negative impact on
transactions. (15 %)
Lessons
Anticipate adverse selection and protect yourself against it.
Using screening or signaling helps overcome the adverse
selection problem so that low-risk individuals can be transacted
with profitably.
Gather enough information to distinguish high-risk from low-

risk consumers.
Direct and indirect methods
Information may be gathered indirectly by offering consumers a
menu of choices, and consumers reveal information about their
risks by the choices they make.
QUESTION 4
Determine the ways your company is dealing with the moral
hazard problem and suggest best practices used in the industry
to deal with it. (15 %)
Moral hazard refers to the reduced incentive to exercise care
once you purchase insurance.
What is the difference between adverse selection and moral
hazard?
Adverse selection arises from hidden information about the type
of individual you’re dealing with.
Moral hazard arises from hidden actions.
The cost of managing both problems can be reduced by reducing
uncertainty (gathering more information).
QUESTION 4
Solution

s to the problem of moral hazard center on efforts to eliminate
the information asymmetry
monitoring
changing the incentives
QUESTION 4
Example: Moral hazard in lending.
This is a problem for both the lender and the borrower. If the
bank anticipates moral hazard they will be less willing to lend,
or demand a higher interest rate.
This incentive conﬂict is only made worse when the borrower
can put other people’s money at risk.
Borrowers take bigger risks with other people’s money than
they would with their own.
To control this, lenders must ﬁnd ways to better align the
incentives of borrowers with the goals of lenders.
Banks sometimes do this by requiring borrowers to put some of
their own money at risk.
This is why banks are much more willing to lend to borrowers
who put a great deal of their own money at risk, but it also
leads to the complaint that banks lend money only to those who

don’t need it.
QUESTION 5
Identify a principal-agent problem in your company and
evaluate the tools it uses to align incentives and improve
profitability. (15 %)
Principals want agents to work for their best interests, but
agents typically have different goals than do principals. This is
called incentive conﬂict.
In a well-run organization, decision makers have
the information necessary to make good decisions and
the incentive to do so.
If you decentralize decision-making authority, you should
strengthen incentive compensation schemes.
If you centralize decision-making authority, you should make
sure to transfer specific knowledge (information) to the decision
makers.
QUESTION 5
Identify a principal-agent problem in your company and

To analyze principal–agent conflicts, focus on three questions:
Who is making the bad decisions?
Does the employee have enough information to make good
decisions?
Does the employee have the incentive (performance evaluation
+ reward system) to make good decisions?
Alternatives for controlling principal–agent conflicts center on
one of the following:
Reassigning decision rights (to someone with better incentives
or information)
Transferring information
Changing incentives (performance evaluation and reward
system)
QUESTION 6
Examine the organizational structure of your company and
suggests ways it can be changed to improve the overall
Organizational options
Functional (U-form): A functionally organized firm is one in
which various divisions perform separate tasks, such as
production and sales.

M-Form: An M-form ﬁrm is one whose divisions perform all the
tasks necessary to serve customers of a particular product or in
a particular region.
QUESTION 6
Companies with functional divisions share functional expertise
within a division and can more easily evaluate and reward
division employees. However, change is costly, and senior
management must coordinate the activities of the various
divisions to ensure they work towards a common goal.
Process teams are built around a multi-function task and are
evaluated based on the success of the task.
QUESTION 6

Three possible solutions for incentive conflicts
Change the division that does the decision making,
Change the flow of information, or
Change a division’s evaluation and compensation schemes
Profit center
The benefit of a profit center is that they are easy to evaluate
(and manage); the cost is that they are concerned only with
their own division profit.
A cost center
It is rewarded for reducing the cost of producing a specified
output.
You can get rid of the conflict by turning one division into a
cost center.
QUESTION 6
In a multi-divisional company, transactions between divisions
can create incentive conflicts.
To understand the source of conflicts that arise between
divisions, personify the divisions and consider each to be a
rational actor. Then ask the same three questions

Which division is making the bad decision?
Does the division have enough info. to make a good decision
Does it have the incentive to do so?
The problems of corporate budgeting and how to fix it
ACADEMIC RESOURCES
Use at least five (5) quality academic resources in this
assignment.
5 %
Note: One of your references should have been published within
the last 6 months.
Note: Wikipedia does not qualify as an academic resource.
FORMATTING REQUIREMENTS
Be typed, double spaced, using Times New Roman font (size
12), with one-inch margins on all sides; citations and references
must follow APA or school-specific format. Check with your
professor for any additional instructions.
Include a cover page containing the title of the assignment, the
student’s name, the professor’s name, the course title, and the
date. The cover page and the reference page are not included in
the required assignment page length.

5 %
Assignment: Dealing with Risk, Asymmetric Information, and
Incentives
Due Week 9 and worth 310 points
Earlier in the quarter we discussed Southwest Airlines’ use of
game theory to create new strategy. Continue to research
Southwest Airlines or a company of your choice and write a six
to eight (6-8) page paper in which you:
1. Evaluate a company’s recent (with in the last year) actions
dealing with risk and uncertainty.
2. Offer advice for improving risk management.
3. Examine an adverse selection problem your company is
facing and recommend how it should minimize its negative
impact on transactions.
4. Determine the ways your company is dealing with the moral
to deal with it.
5. Identify a principal-agent problem in your company and
profitability.

6. Examine the organizational structure of your company and
profitability.
7. Use at least five (5) quality academic resources in this
assignment. Note: One of your references regarding your should
have been published within the last 6 months. Note: Wikipedia
does not qualify as an academic resource.
Your assignment must follow these formatting requirements:
· Be typed, double spaced, using Times New Roman font (size
12), with one-inch margins on all sides; citations and references
must follow APA or school-specific format. Check with your
professor for any additional instructions.
· Include a cover page containing the title of the assignment, the
student’s name, the professor’s name, the course title, and the
date. The cover page and the reference page are not included in
the required assignment page length.
Running head: SOUTHWEST AIRLINE BOARDING AND
GAME THEORY 1
SOUTHWEST AIRLINE BOARDING AND GAME THEORY 2

Southwest Airline Boarding and Game Theory
Students Name:
Professor’s Name:
Course title:
Date:
1
Change in southwest airline boarding
Southwest airline used to rely on the first come first serve basis
booking approach before 2007. After realizing that the
methodology was creating confusion and causing congestion,
the management ought to experiment with the A B C method.
The approach allowed consumers to choose seats based on the
time of the arrival. The transition improved southwest airline’s
booking until a concern arose on the need to enhance fairness in
the booking process in addition to dealing with congestion at
the booking offices. The model favored the person with the
ability to access the terminal in advance. Consumers checking

in at the booking terminals benefitted from the privileges of
securing a good seat compared to those booking online.
According to Talwalkar (2015), the decision that followed
entailed categorization of the passengers based on the time of
checking in online. The approach prioritized those on the lower
category. The changes translated to the increase in profitability
despite minor hitches to the approach of booking.
The new model for adaptation recognized the ability to check
platform online has influential in the decision of the passenger.
The categorization sought to exploit technology in automating
the assignment of seats. Traveler legible to fly could check in
on the platform of the airlines as well as affiliates 24 hours in
advance. The exploitation of the model continued until 2009
when the airlines terminated association with affiliate sites that
demanded a charge of $1 per booking. The innovation of the
early-bird check-in followed. The model revolutionized the
approach of categorizing traveler as A B and C. Following
deliberations on the need to enhance efficiency in the process to
ascertain much yield, the airlines formulated the option of the
lottery and priority booking. According to the process, the
consumer had the privilege of determining the seating position
by adding an extra $10 to the normal rates charged in priority
booking. Those enrolled for the lottery did not have to remit the
amount but participate in a game that presents the opportunity
to secure a seat of the choice based on the decision made earlier

of booking the airline in advance.
2
Main goal in introducing early bird
The primary goal of the adaptation of the early-bird booking
was to present the clientele the opportunity to reserve seats by
incurring additional payments that enhances convenience. The
airlines aimed at maximizing profits but presenting the decision
in a manner that entices the consumers to support the initiative.
The approach encourages competition among consumers then
exploiting the technological platform in making a decision that
appeals to all consumers. The alternatives in the booking sought
to increase the level of consumers (Talwalkar, 2015). The
approach considered those willing to part with some amount to
secure a lucrative seat and those willing to participate in a game
of chance that increases the probability of securing a good seat.
The objective in adopting the booking that replicates a lottery is
ensuring consumers that the airlines acknowledge their needs
even though the approach does not guarantee the desired seat.
The commendable aspect of the methodology is that it
encourages the exploitation of technology in bookings and such
minimizes costs of operation and human error in decision-
making. Additionally, the program allowed the airline
technological resources the privilege to influence the decision
based on consumer’s preferences instead of relying on human
judgment (Talwalkar, 2015). The nature of the game

complicates affairs to the extent of making it difficult for the
consumer to conceptualize its shortcomings. In the long-term, it
presents the opportunity to quantify the number of bookings
before the flights.
3
Use of game theory
The airlines exploited the game theory for profitability by
encouraging consumers seeking privileged seats to remit an
additional $10 for the service. The traveler remitted the amount
expecting to secure the desirable seat. Those unwilling to pay
the rate had the privileges of participating in an open game of
lottery that allowed technological apps to assign the clientele
seat based on availability. According to the game, the
placements of the booking signified the decision to initiate the
systems to check the available seats. The prioritization
depended on the suggestion of the consumers. The lottery
modeled the demands in accordance with the number of
participants (Talwalkar, 2015). The person that made early
bookings enrolled for the lottery faster before the group that
followed. The experiences of those unwilling to remit the $10
differed from that of those remitting the amounts to the airlines
on online bookings. However, the model ensured that the
airlines have motivated the person to book a ticket either by a
lottery of payment of the extra dollar leading to an increase in
profitability.

The passenger dominant strategy is the methodology that
assumes that a person willing to secure a good seat will
automatically remit an additional $10 to the normal charges for
the airlines. If the first person to book seeks the early-bird seat,
the next person booking ought to part with a similar amount to
explore the opportunity of securing a similar seat of the
airlines. The end game of the strategy is ensuring that the
consumer willing to pay $ 10 for a good seat and the one
unwilling to remit the same amounts participates in a game that
entices investment in a lucrative seat. Even if each secures the
seat or both fail, the airlines earn an extra $10 from the decision
of the consumers. The approach of encouraging bookings makes
the decision to solicit the good seat the dominant strategy
(Mellat & Fini, 2010). The dominant strategy relies on the
presumption that the competition among consumers unwilling to
pay the extra charge and participate in lottery might persuade
both parties to pay the charges on the expectation of gaining an
advantage over the other.
The booking approach at the airline also exposes the consumer
to the prisoner dilemma. The process is attributable to
participating in the lottery while at the same time paying for the
privileges. There are occasions where the person commences
playing the lottery before resorting to making payments for the
desired seat. The unpredictability of the outcome in either
option influences the circumstances. Regardless of the

alternative chosen, the airline automatically checks in the
consumer while creating the impression that the consumer
dictates the functionality of the check-in programs. After the
decision, the realization that one confronts the complexity in
choosing one alternative over another affects the overall process
that benefits the airline in the long-term. However, in a context
where the consumer has selected two options concurrently, the
process of deciding becomes difficult and such constitutes the
prisoner’s dilemma (Talwalkar, 2015). The person having two
alternatives no longer has the liberty of securing the desired
seat because of the urge to participate in an open lottery.
4
Advantages and disadvantages
The advantage of the early-bird- check-in process is that it
exploits technology and such incur the airlines minimal costs
operating. The decrease in expenses, in turn, increases
profitability that serves the interest of the airline. The second
advantage of the methodology is that the game is addictive and
the more the travelers play the more the profitability to the
airlines. The continuation in the undertakings enhances loyalty
among consumers making it difficult for the competition airline
to cut a share of Southwest airline market. The third advantages
of the methodology of booking are that the number of early bird
booking keeps rising. Another outcome of the game involving
the early bird check-in is that it encourages the prioritization of

either method in making bookings among consumers (Raynor,
2011). The repetition in the behavior makes southwest platform
popular with consumers willing to exploit online platforms in
making bookings.
The disadvantage of the early bird booking process is that the
modality encourages consumers to remit charges without the
assurance of a good seat, especially in a context where the
number of booking surpasses the available seats. The
methodology functions if the numbers of bookings are less than
60. However, in most cases, the airline is attracting excessive
bookings that makes the strategy loses its significance since the
objective was increasing profitability while ensuring consumers
choose desired seats on the airplane. The quest for an A
boarding seat is not a guarantee in the white bird booking
despite the promise that the booking serves the intended
purpose.
Recommendation
In a bid to cope with the competition posed by southwest
airlines, competitor companies can exploit a model similar to
the early bird in encouraging check-in. The modality ought to
prioritize technology then customize option for clients using
low costs strategies (Singh, Vaibhav, & Sharma, 2018). Those
willing to secure good seats should have the privileges of
exploring three alternatives with those unwilling to pay extra
amounts exploring tow options. Those booking online and walk-

in should access similar opportunities but variation should exist
for passengers unwilling to pay the extra amount. The person
should participate in an open lottery with the expectation of
reward points for flying. The airline should in turn accord
higher points that translate in privileges accessible to those
willing to pay extra amounts for good seats. According to
Alamdari & Fagan (2017), the rewards will enhance loyalty that
translates into increased profitability from operations. The
findings of Singh, Vaibhav, & Sharma (2018) on operation of
Indian airlines suggest that low costs approach that exploit
technology increases bookings that benefit airlines in the long-
term.
References
Alamdari, F., & Fagan, S. (2017). Impact of the adherence to
the original low-cost model on the profitability of low-cost
airlines. In Low Cost Carriers (pp. 73-88). Routledge.
Mellat Parast, M., & Fini, E. E. H. (2010). The effect of
productivity and quality on profitability in US airline industry:
an empirical investigation. Managing Service Quality: An
International Journal, 20(5), 458-474.
Raynor, M. E. (2011). Disruptive innovation: the Southwest
Airlines case revisited. Strategy & Leadership, 39(4), 31-34.
Singh, V., Vaibhav, S., & Sharma, S. K. (2018). Using

structural equation modelling to assess the sustainable
competitive advantages provided by the low-cost carrier model:
The case of Indian airlines. Journal of Indian Business
Research.
Talwalkar, P (2015) Southwest Airlines boarding and game
theory

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