Which of the following statements explains how the principal-agent problem arises between…

Which of the following statements explains how the principal-agent problem arises between shareholders and managers?

Manager-agents struggle to balance shareholder-principals’ desire for short-term payoffs with long-term profits.

It is difficult for shareholder-principals to avoid conflicting manager-agents’ efforts with random changes in company performance.

Firms in the patented pharmaceutical industry earned an average return on net worth of 22 percent in 2006, compared with an average return of 14 percent earned by over 1,400 firms followed by Value Line.

Which of the following theories of profit do you think best explains the performance of the drug industry?

Temporary disequilibrium theory of profit

Monopoly theory of profit

Managerial efficiency theory of profit

Consider the shareholder wealth-maximization model of a firm. If a major technological breakthrough is achieved by the firm, reducing its costs of production, the value of the firm is likely to (decline / rise / remain unchanged)

In 2008–2009, the price of jet and diesel fuel used by air freight companies decreased dramatically. As the CEO of FedEx, you have been presented with the following proposals to deal with the situation.

A. Reduce shipping rates to reflect the expense reduction.

B. Increase the number of deliveries per day in some markets.

C. Make long-term contracts to buy jet fuel and diesel at a fixed price for the next two years and set shipping rates to a level that will cover these costs.

Which of the proposals is most likely to decrease the risks associated with future profits?

Proposal A

Proposal B

Proposal C

There is a sudden drop in the expected future rate of inflation. This is likely to shareholder wealth. (decrease / increase)