Which of the Following Would Be an Example of a Principal

question 277

Multiple Choice

Which of the following would be an example of a principal trying to deal with a moral hazard problem?

• A)The parents of an infant secretly place video cameras in their house before the baby-sitter arrives.
• B)An insurance company checks police records to determine if its policyholders have received traffic citations.
• C)An employer examines his workers' output on a daily basis.
• D)All of the above are correct.

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Definitions:

Principal-Agent Problem

An economic conflict where an individual (the agent) has the responsibility to act for the benefit of another party (the principal), but might fail to do so because of differing interests.

Representative Democracy

A form of government where citizens elect officials to represent their interests and make decisions on their behalf in the legislative process.

Private Business

A business entity owned and operated by private individuals, not controlled by the government, and aimed at earning profit.