The Principal-Agent Problem

question 78

Multiple Choice

The principal-agent problem

• A)occurs when managers have more incentive to maximize profits than the stockholders-owners do.
• B)in financial markets helps to explain why equity is a relatively important source of finance for American business.
• C)would not arise if the owners of the firm had complete information about the activities of the managers.
• D)explains why direct finance is more important than indirect finance as a source of business finance.

---

Definitions:

Scooter Rental

A service offering scooters for temporary use, typically charged per minute or hour, popular in urban transport for short distances.

Car Rental

A service industry that provides temporary automobiles for a short period, typically ranging from a few hours to a few weeks.

Lagrange Multipliers

A strategy in mathematics for finding the local maxima and minima of a function subject to equality constraints.

Emergency Rooms

Specialized hospital departments that provide immediate treatment to patients with acute illnesses or injuries.