1)Determine the ways Southwest Airlines is dealing with the moral hazard problem, and suggest best practices used in the industry to deal with it.

2)Identify a principal-agent problem in Southwest Airlines, and evaluate the tools it uses to align incentives and improve profitability.

3)Why do monopolies arise? Explain.

1)South West Airlines is an American airline, which is the world's major low-cost carrier and has its headquarters in Dallas, Texas.

It deals with moral hazard by ensuring it provides the correct information to all parties it enters into contracts with.

The company does this to ensure it does not get on the wrong side of the law, protect itself against unnecessary penalties, and maintain its reputation.

Southwest Airlines has also put in place measures that verify information provided by its employees and has also established incentive policies to avert immoral behavior.

When getting into any contract, the company takes enough measures to ensure there are no loopholes and that every party involved understands the contract's terms clearly.

The best practices in the industry for dealing with moral hazards are; formulating incentive policies that prevent immoral behavior and conducting consistent monitoring.

2)Southwest Airlines faces this problem in business travel. Business travelers want to travel to their destination comfortably and even get rewarded indirectly, while the travel agencies paying for the travel tickets want to minimize the cost incurred in traveling.

Southwest Airlines has established strategies such as the fare-based awards, enabling travelers (Agents) to book late when tickets are less expensive.

This strategy by the airlines aims at eliminating any discord between the travelers (Agents) and the travel agency paying for the tickets (Principal) and ensuring both parties are satisfied.

By doing so, the airline can increase its profits by making more bookings.

3)

Monopolies arise due to various reasons. One common reason is that it is simply better for only one firm to operate in certain industries. This is because this one firm can increase its production to such a level that significant economies of scale set in. This allows the firm to reduce its price so much that no other can firm enter.

Monopolies can also arise due to decisions taken by firms to reduce competition in their market. The largest firms in an industry can combine together to give to a single larger firm which can act as a monopoly in their market. Or a firm can reduce its prices so much that no other firm can exist with it.

Another reason could be government intervention. Certain industries are kept as monopolies by governments to keep the industry efficient. Similarly, when governments provide patents to firms, it allows such firms to act as monopolies, at least for some time.