1) Which one of the following situations is most apt to create an agency problem

Question

1) Which one of the following situations is most apt to create an agency problem? Select one: a. A company researcher is paid a bonus whenever she develops a new method of production that increases the shelf life of the firm's products. b. The production manager is granted an annual bonus based on the size of the firm's total operations. c. The company president receives an annual bonus based on the market value of the firm's stock. d. Each employee is given a gift certificate for a free dinner for two whenever the firm remains accident-free for one year. e. A key employee is granted stock options on an annual basis.

2)

Which of the following correctly describe a dealer market?

I). Dealers match buyers with sellers.

II). Dealers buy and sell for themselves at their own risk.

III). Dealer trading occurs over-the-counter.

IV). Dealer transactions occur on a trading floor.

Select one:

a. I and IV only

b. I, II, and III only

c. II and III only

d. II and IV only

e. I and III only

Explanation / Answer

b. The production manager is granted an annual bonus based on the size of the firm's total operations.

This is because in order to increase his bonue, the production manager would try to increase the sixe of firm's total operations even when such operations are not profitable to the company and do not result is maximizing benefits to stakeholders of the company. This would lead to a conflict of interest between the company's management and its stakeholders hence an agency problem.

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