Author Question: The only two ways of dealing with the principal agent problem are the use of long-term contracts and ... (Read 77 times)

tichca · **on:** Jun 29, 2018

The only two ways of dealing with the principal agent problem are the use of long-term contracts and monitoring.

Indicate whether the statement is true or false

Question 2

Suppose Jenny's marginal utility of fish is 40 and her marginal utility from chips is 20. The price of fish is 10 and the price of chips is 1. What should Jenny do to maximize her utility? Explain your answer.

What will be an ideal response?

cam1229 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

FALSE

Answer to Question 2

Jenny should buy more chips and fewer fish. Her marginal utility per dollar from chips is 20 and her marginal utility per dollar from fish is 4. If Jenny decreases her purchases of fish by 1, she loses 4 units of utility. But if she spends the dollar on chips, she gains 20 units of utility. Because her gain in utility exceeds her loss, Jenny's total utility increases as she buys more chips and fewer fish.