Managerial Economics Discussion Questions

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1) Discuss the owner-manager conflict within the firm. Provide two real world manifestations of the conflict.
Owner-manager conflicts finds it basis on the self-interested behaviors of managers, owners and shareholders. Firm managers may have personal goals that conflict with the owner’s goals of maximizing shareholder wealth. Potential conflicts occur when managers seek to maximize their own utility at the expense of the firm’s shareholders. Conflict between owners and managers typically arise from choice of effort, perquisite taking , differential risk exposure, differential horizons and overinvestment. The text uses the Baan brothers and R. Johnson of RJR Nabisco as examples to illustrate owner-manager conflicts that ultimately led to the failure in serving the best interests of their respective firms’ shareholders and exercising the ethical responsibilities. 2) Discuss the value-maximizing principle. How are reputational concerns related to this principle? Firms use the value-maximizing decisions through incentives, constraints and punishments to achieve the most profitable outcome. Reputational concerns are tied to this principle due to the fact that increased profits may play as incentives and motivators which can encourage unethical decisions that can mar a firm’s reputation. 3) Define the Nash equilibrium. Why is this concept applicable to many oligopoly industries?

Nash equilibrium is a set of mixed strategies for limited and non-cooperative match between two or more firms in which no firm can improve its payoff by switching strategy. Nash equilibrium maintains focus on rivalries with mutual gain. Oligopolistic firms chooses prices and inputs to maximize profits, however, firms could also compete on other dimensions such as location, and in research and advertising. In Nash Equilibrium a firm’s decision is typically its best response, given the actions of its competitor. For example, a value meal at McDonald’s may be $4.50 given that Wendy’s...
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