Moral Hazard Occurs When Contracts Are Written in Such a Way

question 91

Multiple Choice

Moral hazard occurs when contracts are written in such a way that

• A) the interests of agent and principal converge.
• B) the interests of agent and principal diverge.
• C) agents will wish to maximize the principal's utility.
• D) production and risk-bearing efficiency are achieved.

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Definitions:

Direct Materials

Direct materials are raw materials that can be directly attributable to the production process of a product and are a critical component of manufacturing costs.

FIFO Process Cost Method

An accounting method that assigns costs to inventory on the basis of the first-in, first-out principle, particularly useful in manufacturing.

Work in Process

Inventory that includes the materials, labor, and overhead costs for products that are in the production process but not yet completed.

Process Cost Report

A document in cost accounting that details the production costs for units processed during a period, including materials, labor, and overhead.