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I. Define shirking and give the different forms it can take.

II. Principal Agent

1. Define the principal agent problem and what are the solutions to the principal agent problem?

2. Which of the following is an example of the principal-agent problem?

a. A flower man offers a bouquet of flowers for $25. You believe that the price offered is too high and try to convince him to lower the price to $15, but he won’t move the price down.

b. A car dealer is selling you a car. The dealer lowers the price and throws in some fake parts but what the dealer doesn’t know is that the price of the car is beyond your budget and there is no way you will purchase the car.

c. Your family doctor could diagnose your symptom herself as part of your regular visit. But she receives a bonus for referrals, so she recommends you make an appointment with a specialist.

d. You select a hotel over another one because the advertisement shows a pool as part of the amenities. Upon your arrival, you notice a sign indicating that the pool is closed for the rest of the season. If you had known this, you would have selected another hotel.

III. In each of the following two scenarios, what type of transaction is involved? (spot exchange, contract, or vertical integration).

Explain your answer

.

1. ABC, Corporation is a fast food company that grows or produces all the ingredients it needs to make its very popular Burger.

2. XYZ Corporation a big automobile company purchases 4 million dollars of tires from Mich, a local tire company.

I. Define shirking and give the different forms it can take.
II. Principal Agent
1. Define the principal agent problem and what are the solutions to the principal agent problem?
2. Which of the following is an example of the principal-agent problem?
a. A flower man offers a bouquet of flowers for $25. You believe that the price offered is too high and try
to convince him to lower the price to $15, but he won’t move the price down.
b. A car dealer is selling you a car. The dealer lowers the price and throws in some fake parts but what the
dealer doesn’t know is that the price of the car is beyond your budget and there is no way you will
purchase the car.
c. Your family doctor could diagnose your symptom herself as part of your regular visit. But she receives
a bonus for referrals, so she recommends you make an appointment with a specialist.
d. You select a hotel over another one because the advertisement shows a pool as part of the amenities.
Upon your arrival, you notice a sign indicating that the pool is closed for the rest of the season. If you had
known this, you would have selected another hotel.
III. In each of the following two scenarios, what type of transaction is involved? (spot exchange, contract,
or vertical integration). Explain your answer.
1. ABC, Corporation is a fast food company that grows or produces all the ingredients it needs to make its
very popular Burger.
2. XYZ Corporation a big automobile company purchases 4 million dollars of tires from Mich, a local tire
company.

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