Scenario 17.5 Consider the Following Information

question 6

Multiple Choice

Scenario 17.5
Consider the following information:
Income to the firm from workers who sell door-to-door
Bad Luck Good Luck
Low Effort (e = 0) $5,000 $7,000
High Effort (e = 1) $7,000 $13,000
Cost of effort: c = $2500e
Probabilities: Bad luck = .75; Good luck = .25
-A principal-agent problem arises in the situation in Scenario 17.5 because:

• A) the principal can measure effort and output; the agent can measure only output.
• B) the principal can measure only effort, and the agent can measure only output.
• C) the principal can measure only output, and the agent can measure effort and output.
• D) neither the principal nor the agent can measure effort.
• E) neither the principal nor the agent can measure output.

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Definitions:

Poverty Rate

The ratio of the number of people whose income falls below the poverty line; usually taken as a percentage of the population in a given country or region.

Government

The organization, or agency through which a political unit exercises authority and performs functions and which is usually classified according to the distribution of power within it.

Poverty Rate

The ratio of the number of people whose income falls below the poverty line, taking into account their standard of living or the cost of living in a country.

Standard Of Living

Standard of living refers to the level of wealth, comfort, material goods, and necessities available to a certain socioeconomic class or geographic area.