Explain the principal-agent problem as it pertains to equity contracts
What will be an ideal response?
The principals are the stockholders who own most of the equity. The agents are the managers of the firm who generally own only a small portion of the firm. The problem occurs because the agents may not have as much incentive to profit maximize as the stockholders.
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Under what condition are profits maximized?
A) at the rate of output at which marginal revenue equals marginal cost B) at the output rate where marginal cost is greater than marginal revenue C) at the point at which the difference between total revenues and total costs is negative D) at the point at which the difference between price and quantity demanded is greatest
The budget deficit refers to how much has been borrowed:
a. in one particular year. b. over time. c. against Social Security. d. to pay interest on loans.