Which of the Following Correctly Characterize Principals and Agents in Important

question 330

Multiple Choice

Which of the following correctly characterize principals and agents in important examples of the principal-agent problem?

• A) In the doctor/patient relationship, the patient is the principal and the doctor is the agent.
• B) In the lawyer/client relationship, the client is the principal and the lawyer is the agent.
• C) Both of the above answers are correct.
• D) Neither of the above answers is correct.

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Definitions:

Operating Capacity

The maximum level of activity that a company can sustain with its current resources and infrastructure without incurring additional costs.

Investment Center

A business unit or department that is responsible for its own revenues, expenses, and investment in assets, with its performance measured by its return on investment.

Controllable Margin

The portion of profit or income directly influenced by the management decisions, typically excluding fixed costs.

Required Return

The minimum expected return by investors for providing capital, based on the risk of the investment.