Homework Clinic
Social Science Clinic => Economics => Microeconomics => Topic started by: eruditmonkey@yahoo.com on Jul 1, 2018
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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 2
Explain how more than one possible state of nature affects contract choices.
What will be an ideal response?
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Answer to Question 1
B
Answer to Question 2
The uncertainty of the state of nature introduces the risk of random events. This forces principals and agents to incorporate efficiency of risk bearing into contracts.
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Thank you!