Which of the following is an example of a principal-agent problem?
A)A firm fails to earn profits because a manager mismanages the employees.
B)Workers are motivated to do their best on the job regardless of compensation.
C)Buyers opt to buy the low-cost, low-quality version of a product even though they say their primary goal is high quality.
D)Shareholders hire a CEO to increase profits, and the CEO remodels the office with expensive artwork and furnishings.

Question

Quizplus · Accepted Answer

The principal-agent problem refers to the inherent conflict of interest between a principal (shareholders in this case) who hires an agent (CEO) to act on their behalf but may have different goals and incentives. In this example, the shareholders expect the CEO to increase profits, but the CEO prioritizes personal preferences such as expensive office renovations, which may not align with the shareholders' interests.

Which of the Following Is an Example of a Principal-Agent