If an Agent Is Risk Neutral and a Principal Is

question 54

Multiple Choice

If an agent is risk neutral and a principal is risk averse,which of the following contracts would be efficient in risk bearing?

• A) A fixed fee is paid to the agent.
• B) A fixed fee is paid to the principal.
• C) An hourly rate is paid to the agent.
• D) The agent enjoys a share of the profit.

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Definitions:

Total Variable Cost

The sum of all costs that vary with the level of output, including expenses like materials and labor, but not fixed costs.

Output Level

Refers to the quantity of a product or service produced by a company or an economic sector within a specific period.

Average Product

The output per unit of input, calculated by dividing total production by the total quantity of input.

Labor

The work performed by humans that is used in the production of goods and services.