Solving the principal-agent problem ensures that the firm is operating:
A) on the production function.
B) above the production function.
C) below the production function.
D) above the isoquant curve.

Question

Quizplus · Accepted Answer

Solving the principal-agent problem ensures that the agent (e.g., an employee or manager) acts in the best interest of the principal (e.g., the owner), leading to efficient operation on the production function, where inputs are converted to outputs in the most productive way possible.

Solving the Principal-Agent Problem Ensures That the Firm Is Operating