If an Agent Is Risk Averse and a Principal Is

question 55

Multiple Choice

If an agent is risk averse and a principal is risk neutral, if the agent pays the principal a fixed fee

• A)all risk is eliminated.
• B)the risk neutral person bears all the risk while the risk averse person bears none.
• C)the risk averse person bears all the risk while the risk neutral person bears none.
• D)the principal and agent share risk equally.

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Definitions:

Production

The process of creating goods or services using labor, machinery, and raw materials.

Price Taker

A market participant that accepts prevailing market prices as given, without having the power to influence these prices.

Competitive Market

A market structure characterized by many buyers and sellers, free entry and exit, and products that are similar, ensuring no single entity can control prices.

Profits

The financial gain achieved when the revenues generated from business activities exceed the expenses, taxes, and costs incurred in operating the business.