How does the principal-agent problem increase the possibility of moral hazard?
What will be an ideal response?
The shareholders, as owners of the firm, are the principals, while the top managers, who are hired to carry out the owner's wishes, are the agents. Although the shareholders are interested in the managers running the firm so as to maximize the value of the shareholders' investment, the managers may have other objectives. Some top managers are accused of being "empire builders" who are interested in making the firm as large as possible through growth and the acquisition of other firms, even if the firm would be more profitable if it were smaller. Other top managers seem more concerned with using corporate jets and holding meetings in expensive vacation spots than with the firm's profits. Managers even have an incentive to underreport profits so that they can reduce the dividends they owe to shareholders and retain the use of the funds.
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Suppose the Fed buys government securities from a commercial bank. Why is there a multiplier effect on the quantity of money?
What will be an ideal response?
Suppose a sole proprietorship is earning total revenues of $100,000 and is incurring explicit costs of $75,000. If the owner could work for another company for $30,000 a year, we would conclude that:
A) the firm is incurring an economic loss. B) implicit costs are $25,000. C) the total economic costs are $100,000. D) the individual is earning an economic profit of $25,000.