SOLVED

6.2  The Structure of Corporations and the Principal-Agent Problem 1) What is an inside director? A) a movie director who also appears in the movie B) a member of a corporate board of directors that is also a manager of the business C) the CEO that is selected by the corporation’s board of directors D) a board of director chair who has been in the job for at least three years 2) Corporate governance involves the way in which A) the government nationalizes corporations. B) the government licenses corporations. C) a corporation is subject to government regulations. D) a corporation is structured. 3) Who operates and controls a corporation in its day-to-day activities? A) the board of directors B) stockholders C) employees D) management 4) A corporation’s board of directors A) hire the managers of the corporation. B) control the day-to-day activities of the corporation. C) are personally liable for the debts of the corporation. D) are the sole owners of the corporation. 5) Stockholders A) select the board of directors of a corporation. B) select the employees of a corporation. C) select the managers of a corporation. D) all of the above 6) What do economists call the situation where a hired manager does not have the same interests as the owners of the business? A) conquest and control B) a financial problem C) a principal-agent problem D) a financial intermediary problem 7) The person hired by a corporation’s board of directors to run the day-to-day operations of the corporation is known as the A) chairman of the board. B) chief executive officer. C) owner-manager. D) corporate governor. 8) By tying the salaries of top corporate managers to the price of the corporation’s stock, corporations hope to avoid A) corporate governance. B) conflict between the CFO and the CEO. C) the principal-agent problem. D) paying high salaries to their managers. 9) The existence of the principal-agent problem A) increases the risk of buying stock in a corporation. B) increases the risk of becoming the sole proprietor of a business. C) implies that managers that have the same incentives as the board of directors. D) does all of the above. 10) Corporations are legally owned by their shareholders. 11) The principal-agent problem that exists between shareholders and managers also exists between managers and workers. 12) In a corporation, what are “inside directors” and “outside directors”? 13) Explain what potential conflict exists between shareholders in a corporation and the corporation’s managers. 14) Explain the relationships between a corporation’s shareholders, its board of directors, and its top managers. 15) Scott is a manager at a pool cleaning business. He has hired 10 workers to clean pools for him and is considering what type of payment scheme he should set up for his workers. He can pay each of his workers $10 per hour to clean pools, or he can pay his workers $20 for each pool a worker cleans. (It takes 2 hours, on average, for an employee to clean a pool thoroughly.) If Scott wants to maximize the number of pools his workers clean in one day, which payment scheme should he use? Explain.