Question 1

The principal-agent problem occurs as a result of:

Accepted Answer

A)  the absence of a contract between managers and owners. 
B)  the separation of ownership from management. 
C)  the difficulty of identifying the principal agent with whom to negotiate. 
D)  competition between managers at various levels. 
E)  none of the above. 
A)  the absence of a contract between managers and owners. 
B)  the separation of ownership from management. 
C)  the difficulty of identifying the principal agent with whom to negotiate. 
D)  competition between managers at various levels. 
E)  none of the above.

Question 2

Use the following profit function (per worker)for the Blue Delta Faucet Company to answer this question. P(e)= 40e - (2e2 + 100)
Note that P = firm profits and e = worker-hours per day.Assume that effort is observed perfectly.What is the profit-maximizing level of effort for the firm to set for workers?

Accepted Answer

A)  There is no effort level that maximizes profits in this case. 
B)  3.16 hours per day. 
C)  8 hours per day. 
D)  10 hours per day. 
E)  12 hours per day. 
A)  There is no effort level that maximizes profits in this case. 
B)  3.16 hours per day. 
C)  8 hours per day. 
D)  10 hours per day. 
E)  12 hours per day.

Question 3

A manager has a utility function U = C 0.5 if she doesn't work hard and U = C 0.5 - 1 if she does.Expected profit will increase from 1,400 to 1,600 if she works hard.The manager receives compensation C equal to 82 plus a portion x of any profit in excess of 1,400.What is the value of x that will make the manager indifferent between shirking and working hard?

Accepted Answer

A)  0.095. 
B)  0.105. 
C)  0.19. 
D)  0.242. 
E)  None of the above. 
A)  0.095. 
B)  0.105. 
C)  0.19. 
D)  0.242. 
E)  None of the above.

Question 4

The moral-hazard problem occurs when:

Accepted Answer

A)  a consumer of insurance changes his or her behavior in such a way as to decrease the probability of a payoff. 
B)  a consumer of insurance changes his or her behavior in such a way as to increase the probability of a payoff. 
C)  insurance companies change their behaviors in such a way as to increase the probabilities of a payoff. 
D)  insurance companies change their behaviors in such a way as to decrease the probabilities of a payoff. 
E)  none of the above. 
A)  a consumer of insurance changes his or her behavior in such a way as to decrease the probability of a payoff. 
B)  a consumer of insurance changes his or her behavior in such a way as to increase the probability of a payoff. 
C)  insurance companies change their behaviors in such a way as to increase the probabilities of a payoff. 
D)  insurance companies change their behaviors in such a way as to decrease the probabilities of a payoff. 
E)  none of the above.

The principal-agent problem occurs as a result of:

The moral-hazard problem occurs when:

Introduction

Demand Theory

Consumer Behavior and Rational Choice

Estimating Demand Functions

Production Theory

The Analysis of Costs

Perfect Competition

Monopoly and Monopolistic Competition

Managerial Use of Price Discrimination

Bundling and Intrafirm Pricing

Oligopoly

Game Theory

Auctions

Risk Analysis

Adverse Selection

Government and Business

Optimization Techniques

Appendix Problems

Filters

Exam 15: Principalagent Issues and Managerial Compensation

The principal-agent problem occurs as a result of:

The moral-hazard problem occurs when:

Introduction

Demand Theory

Consumer Behavior and Rational Choice

Estimating Demand Functions

Production Theory

The Analysis of Costs

Perfect Competition

Monopoly and Monopolistic Competition

Managerial Use of Price Discrimination

Bundling and Intrafirm Pricing

Oligopoly

Game Theory

Auctions

Risk Analysis

Adverse Selection

Government and Business

Optimization Techniques

Appendix Problems

Filters