In the principal-agent model,at the employee's optimal effort choice:
A)the net benefits of effort are maximized.
B)the marginal costs of efforts exceed the marginal revenue.
C)the incentive coefficient of effort is very high.
D)the marginal benefit of effort is negative.

Question

Quizplus · Accepted Answer

In the principal-agent model, the employee's optimal effort choice occurs when the net benefits of effort are maximized. This means that the additional benefits received from putting in more effort outweigh the additional costs of doing so. Therefore, the best choice is option A. Option B is incorrect because if the marginal costs of effort exceed the marginal revenue, the employee will not choose to put in effort. Option C is incorrect because a very high incentive coefficient of effort would imply that the employee would need a very high reward to put in effort, which may not necessarily be the case in the principal-agent model. Option D is incorrect because the marginal benefit of effort cannot be negative at the employee's optimal effort choice.

In the Principal-Agent Model,at the Employee's Optimal Effort Choice