If an Agent Is Risk Neutral and a Principal Is

question 54

Multiple Choice

If an agent is risk neutral and a principal is risk averse,which of the following contracts would be efficient in risk bearing?

• A) A fixed fee is paid to the agent.
• B) A fixed fee is paid to the principal.
• C) An hourly rate is paid to the agent.
• D) The agent enjoys a share of the profit.

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Definitions:

Accounting Process

A systematic series of steps to collect, record, and analyze financial transactions of a business for reporting and tax purposes.

Transactions

Economic activities or events that change the financial position of a company and can be measured in monetary terms.

Business Expense

Expenditures incurred during the operation of a business, considered necessary, ordinary, and customary for conducting business activities.

Income Statement

A report detailing a company's financial activities, including income, expenditures, and profit, over a certain period.