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Which of the following scenarios best illustrates the concept of 'principal-agen...

May 17, 2024

Which of the following scenarios best illustrates the concept of 'principal-agent problem'? A) A consumer deciding between two brands of cereal B) A shareholder and a CEO having misaligned interests regarding company strategy C) A factory producing goods at maximum efficiency D) A company pricing its products to maximize profit

Solution

a

Principal-Agent Problem: The principal-agent problem occurs when one party (the principal) hires another party (the agent) to perform a task, but the agent's interests are not perfectly aligned with those of the principal

b

Misaligned Interests: In scenario B, the shareholder (principal) and the CEO (agent) may have different goals. For example, the shareholder might prioritize long-term growth, while the CEO might focus on short-term profits to increase their bonus

Answer

B) A shareholder and a CEO having misaligned interests regarding company strategy

Key Concept

Principal-Agent Problem

Explanation

The principal-agent problem is best illustrated by the scenario where a shareholder and a CEO have misaligned interests. This is because the shareholder (principal) hires the CEO (agent) to manage the company, but their goals may not always align, leading to potential conflicts.