Why do solutions to the principal–agent problem sometimes produce problems? Give an example
What will be an ideal response?
The most effective solution to address the problem of shirking or to reduce the cost of monitoring workers may cause problems with other parties outside the principal–agent agreement. For example, stock options may prompt some unscrupulous business executive to manipulate the value of their accounting costs and revenue to give a false impression of the firm’s profitability and inflated the value of the stock. When the value of the stock rises, these executives can then sell their stock options and make more money.
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Assume foreign beer is a normal good. If the incomes of demanders increase,
A) demand for foreign beer will increase. B) the quantity supplied of foreign beer will increase. C) the price of foreign beer will increase. D) all of the above will occur. E) none of the above will occur.
If a perfectly competitive firm's price is less than its average total cost but greater than its average variable cost, the firm
A) is earning a profit. B) is incurring a loss. C) should shut down. D) is breaking even.
When a firm produces 1000 widgets with total cost of $2000 and fixed cost of $1000, what is the average variable cost?
A) $2 B) $1 C) $0.50 D) $0.20
In this chapter we are told that people's tastes not only can differ but must differ. This is because
A. genetic programming makes it impossible for people to have the same preferences. B. no two persons could have the same preferences. C. people with differing tastes can profitably invade any population of similar tastes. D. homogeneous populations become complacent and lose their vigilant qualities.