1. Explain several dimensions of the shareholder-principal conflict with manager agents known as the principle-agent problem. To mitigate agency problems between senior executives and shareholders, should the board's compensation committee devote more to executive salary and bonus (cash compensation) or more to long-term incentives? Why? What role does each type of pay in motivating managers? (Total :10 marks)

2. In the context of the shareholder wealth maximization model of a firm, what is the expected impact of each of the following events on the value of the firm? Explain why A)New foreign competitors enter the market. (3 marks)

B) Strict pollution control requirements are enacted. (3 marks)

C)The rate of inflation increases substantially. (4 marks)

(Total:10 marks)

3. Assume that the market for flour, bread and jam are initially in equilibrium. Imagine that a long-term drought destroys much of the wheat crops. Analyze the effect of the long-term drought on the market for each of the three goods. Explain using the demand-supply diagrams.

(Total:15 marks)

4. Chicken supplies are affected because of the outbreak of bird flu in many poultry farms. Use the demand-and-supply concept to illustrate this change in the chicken-market.

(Total:15 marks)

5. The demand function for bicycles in Holland has been estimated to be

Q= 2000 +15 Y - 5.5 P

Where Y is income in thousand of euros, Q is the quantity demanded in units, and P is the price per unit. When P = 150 euros and Y = 15(000) euros, determine the following:

1. Price elasticity of demand

(5 marks)

1. Income elasticity of demand

(5 marks)

1. Define cross-price elasticity and point elasticity

(5 marks)

(Total:15 marks)

6. The Future Flight Corporation manufactures a variety of Frisbees selling for $2.98 each. Sales have averaged 10,000 units per month during the last year. Recently Future Flight's closest competitor, Soaring Free Company, cut its prices on similar Frisbees from $3.49 to $2.59. Future Flight noticed that its sales declined to 8,000 units per month after the price cut.

1. What is the arc cross elasticity of demand between Future Flight's and Soaring Free's Frisbees?

(8 marks)

1. If Future Flight knows the arc price elasticity of demand for its Frisbees is -2.2, what price would they have to charge to obtain the same level of sales as before Soaring Free's price cut?

(7 Marks)

(Total: 15 marks)