DTERM EXAM A RTI: MULTIPLE CHOICE The principal-agent problem arises when: a. th
ID: 1193465 • Letter: D
Question
DTERM EXAM A RTI: MULTIPLE CHOICE The principal-agent problem arises when: a. the principal and the agent have different objectivers b. the principal cannot decide whether the firm should seek to maximize the expected future profits of the firm or maximize the price for which the firm can be sold. the principal cannot enforce the contract with the agent or finds it too costly to monitor the agent. both A and C c. e. none of the above Suppose Marv, the owner-manager of Marv's Hot Dogs, earned $72,000 in revenue last year. Marv's paid out $36,000 for his operating costs. Marv has a Bachelor of Science degree in mechanical engineering and could be earning S30,000 annually as mechanical engineer. D) Marv's implicit cost of using owner-supplied resources is $36,000. 1) Marv's accounting profit is $36,000. III) Marv's economic profit is $6,000. Only I is true. b. Only II is true. c. Only I and II are true. d. Only II and III are true. e. All of the above are true. Economic profit is the best measure of a firm's performance because: a. economic profit fully accounts for all sources of revenue. implicit costs are generally too difficult to measure accurately. C.the opportunity cost of using ALL resources is subtracted from total revenue. d. only explicit costs influence managerial decisions since, in general, only explicit costs can be subtracted from revenue for the purposes of computing taxable profitExplanation / Answer
1. D is the correct answer, both A and C together constitute the principal agent problem.
2. D is the correct answer. Economic profit = Revenue - (Explicit cost + opportunity cost),
So economic profit = 72000 - (36000+30000) = $6000.
Accounting profit = Revenue - explicit cost.
Acoounting profit = 72000-36000 = $36000. Thus, 2nd and 3rd both statements are correct.
3. C is the correct answer, Economic profit is the best measure of a firm's performance because it incorporates the opportunity cost which is not otherwise included in accounting profit.
4. A is the correct option. When price of a good changes, there's a movement along the curve and not a shift. When factors other than price (affecting demand) change, the demand curve shifts.
5. The correct option is B. When the demand is higher than the supply, to balance out the effect, price acts as a stimulant, and hence price would rise and will be higher than the equilibrium level. C is not the correct answer because it says the price hike will lead to decrease in demand, here the cause is price hike and consequence is decrease in demand. Whereas scenario in option B is cause is demand hike and consequence is prices rising. Both B and C are contradicting actually, in a sense. So, as per logic and flow of sequences, B is the answer.
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