Part A

Consider Devi a newly employed worker in a chocolate factory who has a performance meeting with the Floor Manager. They agree on a performance contract that sets Devi's weekly output to a minimum of 50,000 cherry-covered chocolates. Will this performance agreement between Devi and the Floor Manager give rise to agency theory? Why or why not?

Part B

The board of Infinity Ltd is considering business proposals from two major suppliers who are competing for work:

Prime Merchants Ltd offers the first proposal that would create significant economies of scale and Infinity Ltd will save almost $2 million every year. Further, Prime Merchants Ltd offered each of the directors of the board an "all expenses weekend away"; as well as a gift of $50,000 each if the proposal is accepted by Infinity Ltd.

Galaxy Ltd offers the second proposal, it would not only save Infinity Ltd $2 million every year but it would also result in a guaranteed increase in revenue of $1 million. Besides that, there are no other significant differences between the two proposals.

i.In terms of agency theory, which proposal will the agent accept and why?

Agency theory assumes that the agents are in a position of power since they have access to information and are in a position to make decisions. Justify how can the board of Infinity Ltd highlight this assumption.