The solutions to the principal-agent problem ensures that the firm is operating

Question

Quizplus · Accepted Answer

The principal-agent problem refers to the conflict of interest that arises between the owners of a firm (the principals) and the managers (the agents) who are hired to run the firm on their behalf. The agents may have different goals and incentives than the principals, which can lead to inefficiencies and conflicts.

To ensure that the firm is operating on the production function, the principals have to design appropriate incentives and monitoring mechanisms to align the interests of the agents with their own. This can be done through various means such as performance-based pay, profit-sharing, stock options, or regular performance reviews. By implementing these solutions, the agents are motivated to work towards the goals of the principals, and the firm can achieve optimal production levels without wasting resources. Therefore, Answer A is the best choice, as it indicates that the firm is operating efficiently and effectively.

The Solutions to the Principal-Agent Problem Ensures That the Firm