Principal-Agent Problem Practice Questions

1. Which of the following is a case of the principal-agent problem? *

a. The ice cream man offers you $3 for an ice cream cone. You think this is too high and try to convince him to lower the price to $2, but he won’t budge.

b. A car dealer tries to sell you a car. She lowers the price and throws in perks. What she doesn’t know is that the car is way outside your budget and there is no way you’ll buy it.

c. You pick one hotel over another because its website advertises having a pool. After you arrive, you find out the pool is closed for the season. If you’d known this, you would have picked the other hotel.

d. Your doctor could diagnose your symptom herself as part of your regular visit. But she receives a bonus for referrals, so she recommends you make an appointment with a specialist.

2. Which of the following is a result of the principal-agent problem? *

a. You think you’re healthy and doctor’s visits are overpriced, so you don’t often go for a checkup.

b. You’ve never owned a car. Though the cost of a car would be affordable for you, you decide not to buy a car at all because of the cost of insurance for first-time drivers.

c. You want an accountant but fear they’ll charge you for a bunch of services you don’t really need, so you don’t hire one.

d. The airline you’re traveling with has a great track record so you decide not to purchase travel insurance.

3. Which of the following is NOT a case of the principal-agent problem successfully avoided? *

a. You decide against hiring a certain mechanic when you hear from a friend that the mechanic swindles his customers. You choose a different mechanic certified by a third party consumer protection agency.

b. You decide against hiring a certain trainer when you hear from a friend about another trainer who charges less for similar work.

c. Before buying headphones, you check online reviews that say they tend to stop working after a few months. You decide to buy different headphones with much better reviews.

d. Prior to getting a repair on your house, you hire an inspector whose only job is to diagnose what work is needed. You then hire a contractor to do only that work.

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Principal-Agent Problem Practice Questions

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