CAIE A-Level Economics 7.7.5 Principal-Agent Problem

CAIE A-Level Economics 7.7.5 Principal-Agent Problem
Cambridge International AS & A Level Economics 9708 syllabus for exams in 2026, 2027 and 20282026–2028

Practise identifying conflicts when managers or other agents act for owners and evaluating how hidden actions, different objectives, contracts, monitoring and incentives affect…

How this is tested

  • identify the principal, agent and conflicting objective before labelling the problem
  • link separation of ownership and control to growth, perks or lower profit and efficiency
  • evaluate monitoring, profit-linked pay, share ownership and contracts as alignment mechanisms

Question 1

[Maximum number: 1]

What is likely to lead to the principal-agent problem?

A

a manager of a business makes decisions on behalf of the owner

B

music festival tickets are purchased by a person who intends to sell them at a large profit

C

the government is the only buyer of a pharmaceutical product

D

there is only one firm that manufactures the product