Explain what the principal-agent problem is, and explain evidence of its existence in hospitals in the United States
What will be an ideal response?
The principal-agent problem is an example of asymmetric information in the market place. This problem occurs when one person's welfare (the principal) depends upon what another person does (the agent).
The study of 725 hospitals from 14 major hospital chains by Herzlinger and Krosker found that the rate of return on investment and the average costs of two types of hospitals did differ. They found that for-profit hospitals earned an 11.6 percent return on investment, and nonprofit hospitals earned 8.8 percent return on investment in 1977. After differences in hospital functions were netted out, using regression analysis, the authors found that the average cost of a patient day in nonprofit hospitals was 8 percent higher than in for-profit hospitals.
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In one week Alice can produce 5 pairs of shoes or 4 bookshelves while Roger can produce 10 pairs of shoes or 6 bookshelves. Alice has ________ advantage in producing ________
A) an absolute; shoes B) a comparative; shoes C) an absolute; bookshelves D) a comparative; bookshelves
The Coase theorem states that if transaction costs are low, the number of parties is small, and property rights are well established
A) the government must intervene to eliminate any externalities in the market. B) private transactions are efficient. C) there will be no pollution. D) Both answers B and C are correct.