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:

Remedial Measures

Actions taken to correct or improve a situation, often implemented after identifying problems or weaknesses.

Systematic Thinking

A cognitive approach that involves understanding and solving problems through a step-by-step process, considering all components and their relationships.

Rational

Based on reasoning or logic; pertaining to the ability to think, understand, and form judgments by a process of logic.

Step-by-step

A phrase describing a process or procedure that takes place gradually, one stage at a time.