ECON 101 2Midtermreview

Over the output range with increasing marginal

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Unformatted text preview: oduction that uses a market- like mechanism to induce workers to perform in ways that maximize the firm’s profit. Mixing the Systems Most firms use a mix of command and incentive systems to maximize profit. They use commands when it is easy to monitor performance or when a small deviation from the ideal performance is very costly. They use incentives whenever monitoring performance is impossible or too costly to be worth doing. The Principal–Agent Problem The principal–agent problem is the problem of devising compensation rules that induce an agent to act in the best interests of a principal. For example, the stockholders of a firm are the principals and the managers of the firm are their agents. Coping with the Principal–Agent Problem Three ways of coping with the principal...
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