age 1 of 76
Solutions for Managerial Economics and
Organizational Architecture, 7th Edition by Brickley
EXAM 2025/2026 || QUESTIONS WITH CORRECT
DETAILED ANSWERS || 100% GUARANTEED PASS
<LATEST UPDATE>
Start slideshow 1: What are the three main types of incentives
.......Answer.........Explicit, implicit and intrinsic incentives
Why does the employee want to shirk? .......Answer.........Effort is
costly. By shirking the agent can still be paid a wage, but put in
less effort, which is favorable if there are no incentives to work
hard. This creates conflicts of interest because the employee and
employer don't aim for the same effort level.
Tell what thee principal-agent problem is? What are the two
main problems in the principal-agent problem and give
,age 2 of 76
examples of them? .......Answer.........I will tell it with an example.
The shareholder is the principal and the CEO is the agent. The
principal wants the agent to advance their goals.
But there is to main problems here; the conflict of interest and
the information assymetri/moral hazard problm.
The reason for the conflict of interest can be multible reasons:
- the agent wants to shirk
- the agent wants to minimize risk
- the agent wants to boost his promotion chances
There is also a information assymetri problem:
,age 3 of 76
It is difficult for the principal to monotoring the agent (it is
though used quite often, but it has some limits). It is also
expensive and the be a sign of mistrust.
The principal can look at the output but it is a imperfect signal,
for example the reason for a higher profit in the firm can be a
boom in the world economy.
How is moral hazards a risk in the principal agent framework?
.......Answer.........The agent knows that the principal can't monitor
his efforts in detail, and therefore he wants to shirk.
How can you try to solve the problems? .......Answer.........A way
to try to solve these problems is to provide incentives, which link
the agent's pay to the profit. There are different ways to that
for example it could be:
, age 4 of 76
- Performance sallary
- Commision rate
- Bonus
- Stocks
But it can also be non-monetary incentives like free parking or
best employee of the month reward.
If you look at incentives provision under certainty and the effort
is observable what would thee firm pay the worker ? Look at
this framework: The company gets revenue of 100e . (e is effort)
The cost function for the employee.
Solutions for Managerial Economics and
Organizational Architecture, 7th Edition by Brickley
EXAM 2025/2026 || QUESTIONS WITH CORRECT
DETAILED ANSWERS || 100% GUARANTEED PASS
<LATEST UPDATE>
Start slideshow 1: What are the three main types of incentives
.......Answer.........Explicit, implicit and intrinsic incentives
Why does the employee want to shirk? .......Answer.........Effort is
costly. By shirking the agent can still be paid a wage, but put in
less effort, which is favorable if there are no incentives to work
hard. This creates conflicts of interest because the employee and
employer don't aim for the same effort level.
Tell what thee principal-agent problem is? What are the two
main problems in the principal-agent problem and give
,age 2 of 76
examples of them? .......Answer.........I will tell it with an example.
The shareholder is the principal and the CEO is the agent. The
principal wants the agent to advance their goals.
But there is to main problems here; the conflict of interest and
the information assymetri/moral hazard problm.
The reason for the conflict of interest can be multible reasons:
- the agent wants to shirk
- the agent wants to minimize risk
- the agent wants to boost his promotion chances
There is also a information assymetri problem:
,age 3 of 76
It is difficult for the principal to monotoring the agent (it is
though used quite often, but it has some limits). It is also
expensive and the be a sign of mistrust.
The principal can look at the output but it is a imperfect signal,
for example the reason for a higher profit in the firm can be a
boom in the world economy.
How is moral hazards a risk in the principal agent framework?
.......Answer.........The agent knows that the principal can't monitor
his efforts in detail, and therefore he wants to shirk.
How can you try to solve the problems? .......Answer.........A way
to try to solve these problems is to provide incentives, which link
the agent's pay to the profit. There are different ways to that
for example it could be:
, age 4 of 76
- Performance sallary
- Commision rate
- Bonus
- Stocks
But it can also be non-monetary incentives like free parking or
best employee of the month reward.
If you look at incentives provision under certainty and the effort
is observable what would thee firm pay the worker ? Look at
this framework: The company gets revenue of 100e . (e is effort)
The cost function for the employee.
