Suppose an agent must pay the full marginal cost for an item but splits the marginal revenue with the principal.As a result,
A) joint profit is maximized.
B) joint profit is not maximized.
C) the agent will not enter into such a contract.
D) the agent wishes to sell as many items as he can.

Question

Quizplus · Accepted Answer

In this scenario, the agent has a greater incentive to sell more units than the principal because the agent only bears half of the marginal revenue cost. This can result in the agent pushing sales beyond the point where marginal revenue equals marginal cost, leading to a lower joint profit. Therefore, joint profit is not maximized.

Suppose an Agent Must Pay the Full Marginal Cost for an Item