What Is the Principal-Agent Problem

question 126

Multiple Choice

What is the principal-agent problem?

• A)It is a problem caused by a person (principal)who hires an agent to act on his behalf but is unwilling to delegate authority to the agent to carry out the task in the best possible way.
• B)It is a problem caused by agents pursuing their own interests rather than the interests of the principals who hired them.
• C)It is a problem of the power system of boss and subordinate where the boss (principal)exerts influence over his subordinates (agents)using punishment or threat.
• D)It is a problem that exists when a person (principal)has more information about the task than the agent he hires to perform the task.

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Definitions:

Annual Lease

A contract or agreement that outlines the terms under which one party agrees to rent property from another party for a period of one year.

Payments to Workers

Financial remuneration provided to employees for their labor, often in the form of wages or salaries.

Entrepreneur's Forgone Interest

The potential revenue lost by investing in one's own business instead of utilizing those funds in an alternative investment.

Normal Profit

The level of profit necessary for a company to remain competitive in the market, covering opportunity costs, but not creating economic profit.