Question

1.An incentive conflict is when

a. ​The agent and the principal have identical incentives

b. ​The agent has different incentives than does the principal

c. ​The agent and the principal neither have any incentives to work hard

d. ​None of the above

2.A payday loan company has decided to open several new locations in the city. To decide where to open these locations it hires consultants and pays them per store opened. At the end of the quarter, the company notices a many of the new stores' sales volume fail to meet expectations. This is because

a. ​The consultants are paid per store and not just profitable store locations

b. ​The consultants are paid per store and hence choose the best locations

c. ​The consultants would always choose the best locations

d. ​None of the above

3.To solve the principle agency problem, which of the following questions should you ask

a. ​Who is making the bad decision?

b. ​Does the decision maker have all the relevant information?

c. ​Does the decision maker have the incentive to make the right decision?

d. ​All of the above

5.The reason that a salaried salesman is not working diligently in making high margin sales for the principal could be

a. ​Adverse selection

b. ​Moral hazard

c. ​All of the above

d. ​None of the above

Answer 1

1.

B

This conflict takes place when agent and principal have different interests towards the incentives and their actions differ.

2.

A

Consultant focused upon opening new stores, rather selecting nest locations for the stores to earn high sales volume.

3.

D

All the given questions should be asked by the principal to solve the agency problem.

5.

D

It is the problem of agency conflict, that is leading the salaries salesman to not sell the high margin products for the principal.