#1
What is the Principal-Agent problem?
A situation where the principal benefits more than the agent.
A situation where the agent benefits more than the principal.
A situation where there is perfect alignment of interests between principal and agent.
A situation where the principal and agent are unrelated.
#2
Which of the following is an example of a moral hazard problem?
A shareholder voting on company policy.
An insured driver driving recklessly knowing that they are covered for accidents.
An agent working diligently to maximize shareholder value.
A CEO receiving a bonus for increasing company profits.
#3
What is the term used to describe the situation where one party in a contract has more information than the other party?
Information asymmetry
Perfect information
Symmetric information
Incomplete information
#4
Which of the following is an example of the Principal-Agent problem?
A manager working for the best interest of the shareholders.
A politician making decisions in the public interest.
A lawyer representing their client's interests.
A CEO maximizing their own bonuses at the expense of company performance.
#5
What role do economic incentives play in mitigating the Principal-Agent problem?
They exacerbate the problem by creating conflicts of interest.
They have no effect on the Principal-Agent problem.
They align the interests of the principal and agent.
They are unrelated to the Principal-Agent problem.
#6
Which economic theory is often used to understand Principal-Agent relationships in contracts?
Game Theory
Supply and Demand
Rational Choice Theory
Agency Theory
#7
Which of the following is NOT a potential solution to the Principal-Agent problem?
Stock options
Long-term contracts
Monitoring and performance evaluations
Creating conflicts of interest
#8
Which type of agency costs arises due to the lack of effort or shirking by the agent?
Monitoring costs
Bonding costs
Opportunistic behavior costs
Moral hazard costs
#9
In the context of the Principal-Agent problem, what does the 'moral hazard' refer to?
The principal's ability to enforce contracts.
The agent's tendency to take on excessive risk when their actions are insured.
The alignment of interests between principal and agent.
The presence of economic incentives.
#10
How can monitoring and performance evaluations help alleviate the Principal-Agent problem?
By increasing information asymmetry.
By decreasing transparency.
By providing feedback and accountability.
By reducing the need for economic incentives.
#11
What is the role of asymmetric information in exacerbating the Principal-Agent problem?
It increases the likelihood of the agent acting in the principal's best interest.
It decreases the likelihood of moral hazard.
It decreases the effectiveness of economic incentives.
It creates opportunities for the agent to take advantage of the principal.
#12
How does the Principal-Agent problem manifest in the relationship between shareholders and corporate executives?
Shareholders exerting control over executives' actions.
Executives prioritizing short-term gains over long-term growth.
Executives maximizing shareholder value.
Shareholders acting as agents for corporate executives.
#13
In the context of the Principal-Agent problem, what is the purpose of a bonding cost?
To increase the transparency between principal and agent.
To decrease the information asymmetry.
To ensure the agent fulfills their obligations.
To align the interests of principal and agent.
#14
What is the primary concern regarding moral hazard in insurance contracts?
The insurer's ability to accurately assess risk.
The insured party taking excessive risks due to coverage.
The insured party's inability to pay premiums.
The insurer's ability to deny claims.
#15
Which economic concept is central to understanding the Principal-Agent problem?
Pareto Efficiency
Perfect Competition
Utility Maximization
Incomplete Contracts