Scenario: Edward has inherited a house. As the house is far away from where he lives currently, it has been vacant for the past few years. A housekeeper is paid regularly to look after the house and keep it clean. However, because Edward seldom visits the house, the housekeeper does not clean the house regularly.
-Refer to the scenario above.Identify the correct statement in this case.
A) Edward is a rent seeker.
B) The housekeeper is a free rider.
C) The problem can be solved through government intervention.
D) The relationship between Edward and the housekeeper is an example of a principal-agent relationship.

Question

Quizplus · Accepted Answer

The relationship between Edward and the housekeeper is an example of a principal-agent relationship, as Edward is the principal who hires the housekeeper as his agent to look after the house. However, because Edward does not regularly visit the house and keep an eye on the housekeeper's work, the housekeeper does not do their job effectively. This can be solved by implementing some incentive scheme or monitoring mechanism to ensure that the housekeeper performs their duties properly. The other options, A, B, and C, are not applicable in this scenario.

Scenario: Edward Has Inherited a House