1. Your notebook computer’s hard drive recently crashed, and you decide to take it to a local repair technician to have it fixed. In this relationship,
a. you are the agent.
b. the technician is the principal.
c. the technician is the agent.
d. no principal–agent relationship exists.

2. Principal–agent relationships
a. reduce monitoring costs.
b. occur because managers have good information about employees.
c. are not related to asymmetric information.
d. are subject to moral hazard problems.

3. Principal–agent problems
a. occur when firm managers have more incentive to maximize profit than shareholders do.
b. help explain why equity investments are an important financing source for firms.
c. would not arise if firm owners had complete information about the actions of the firm’s managers.
d. are increased as more information is shared between the parties.

4. Decentralization of decision-making authority is supported by which of the following?
a. A trend of stronger, more active CEOs
b. Shrinking costs of computing bandwidth, which allows information to be inexpensively aggregated from geographically diverse business units
c. Development of micro-computing resources at the corporate, division, and employee level
d. Reduction in the use of incentive compensation

5. You own a retail establishment run by a store manager who receives a flat salary of $80,000. If you set up another store as a franchise with incentive compensation to the franchisee, what would be a reasonable total compensation range that the franchisee could earn?
a. $80,000
b. $40,000–$80,000
c. $60,000–$100,000
d. $80,000–$100,000