6A business is considering hiring a legal firm. The marginal benefit of the legal services would be MB = 90 - q, where q is the quantity provided. The marginal cost of providing the legal services for the legal firm are MC = q. There is a potential agency issue in order to record their efforts the legal firm incurs an auditing cost of $15. Similarly, the business incurs monitoring costs of $5. Another issue is that for the supply in legal services to look legitimate, given the less than perfect auditing and monitoring process, the legal firm needs to supply q = 60, otherwise it looks like they are not supplying anything at all (and would be in breach of their contract). What is the total agency cost?

6A business is considering hiring a legal firm. The marginal benefit of the legal services would be MB = 90 - q, where q is the quantity provided. The marginal cost of providing the legal services for the legal firm are MC = q. There is a potential agency issue in order to record their efforts the legal firm incurs an auditing cost of $15. Similarly, the business incurs monitoring costs of $5. Another issue is that for the supply in legal services to look legitimate, given the less than perfect auditing and monitoring process, the legal firm needs to supply q = 60, otherwise it looks like they are not supplying anything at all (and would be in breach of their contract). What is the total agency cost?

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter20: The Problem Of Adverse Selection Moral Hazard

Section: Chapter Questions

Problem 2MC

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Comparative Advantage and Absolute Advantage Analysis

The theory of absolute advantage was given by Adam Smith in the year 1776.

Question

6A business is considering hiring a legal firm. The
marginal benefit of the legal services would be MB
= 90 - q, where q is the quantity provided. The
marginal cost of providing the legal services for the
legal firm are MC = q. There is a potential agency
issue in order to record their efforts the legal firm
incurs an auditing cost of $15. Similarly, the
business incurs monitoring costs of $5. Another
issue is that for the supply in legal services to look
legitimate, given the less than perfect auditing and
monitoring process, the legal firm needs to supply
q = 60, otherwise it looks like they are not
supplying anything at all (and would be in breach
of their contract). What is the total agency cost?
%3D

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