In a principal-agent relationship, which statement best describes the agent's primary function?

In a principal-agent relationship, which statement best describes the agent's primary function?

• A. The agent's top priority is to negotiate salaries
• B. The agent's role is internal to the firm
• C. The agent's primary function is to create a contract between the principal and third parties
• D. The agent cannot represent the principal in any other ways

Answer: (C)

The key idea is that the agent acts on behalf of the principal to deal with outsiders, and their power to bind the principal comes from creating contracts and agreements with third parties. This external authority is what lets the principal operate in markets without negotiating every deal themselves. The other options miss the broader, external role: negotiating salaries is an internal task and not the main function; the agent’s role isn’t limited to internal matters within the firm; and an agent can represent the principal in various ways as long as they’re authorized, so saying they cannot is incorrect.

The key idea is that the agent acts on behalf of the principal to deal with outsiders, and their power to bind the principal comes from creating contracts and agreements with third parties. This external authority is what lets the principal operate in markets without negotiating every deal themselves. The other options miss the broader, external role: negotiating salaries is an internal task and not the main function; the agent’s role isn’t limited to internal matters within the firm; and an agent can represent the principal in various ways as long as they’re authorized, so saying they cannot is incorrect.