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:

Flu Vaccines

Vaccines that protect against influenza, a contagious respiratory illness caused by influenza viruses.

Marginal Social Benefits

The extra advantage obtained by society from the consumption of an additional unit of any product or service.

Positive Externalities

Benefits that are enjoyed by third-parties as a result of an economic transaction or activity, without them directly participating in the transaction.

Pigouvian Tax

A tax imposed on activities that generate negative externalities, aimed at correcting an inefficient market outcome.