Learning activity 3 ch 1-U1 Javier Hernández Rosado M00-14-4476
1. In what sense do maximization of sales and maximization of management welfare agree or disagree? 2. Negative economic profits is an indicator that the firm is making negative accounting profits. Explain why or why not. 3. Monopoly profit theory is an extension of frictional profit theory. Explain why or why not.
Answers: 1. The maximization of management explain that managers maximize the salaries and fringe the benefits. The maximization of sales includes relationship between executive’s salaries and sales, and a weak relationship between salaries and profits. YOU DID NOT ANSWER THE QUESTION SEE ABSWER BELOW 2. MAXIMIZING SALES THEORY ARGUES THAT THERE IS A WEAK RELATIONSHIP BETWEEN SALARIES AND PROFITS. THIS MEANS THAT SALARIES DO NOT SIGNIFICANTLY EXPLAIN THE VARIATION IN PROFITS. IN OTHER WORDS HIGH SALARIES DO NOT NECESSARILY IMPLY HIGH PROFITS. 3. MAXIMIZING OF MANAGEMENT WELFARE ARGUES THAT MANAGERS WILL MAXIMIZE SALARIES AND FRINGE BENEFITS AND NOT PROFITS IF THEY DON’T PARTICIPATE IN THE OWNER SHIP OF THE FIRM. IN OTHER WORDS IF THE LATTER IS TRUE, THEN THE RELATIONSHIP BETWEEN SALARIES AND PROFITS IS WEAK. UNDER THIS CONDITION THE TWO THEORIES AGREE OTHERWISE THEY DON’T.
2. It all depends on which perspective considers this issue. As an accountant, profit is the difference between total revenue and explicit cost. In the other hand, economists consider the profits equal to total revenue minus implicit and explicit cost. If this difference is positive the company has economic profit, but negative difference indicates economic loss. Zero indicates a normal profit. In the Economic Value Added a positive indicates increase in shareholders wealth. YOU DID NOT ANSWER THE QUESTION, SEE ANSWER BELOW. ACCOUNTING PROFITS CAN BE POSITIVE AND ECONOMIC PROFITS NEGATIVE. THIS WILL HAPPEN WHENEVER IMPLICIT COSTS MORE THAN OFFSETSS BUSINESS PROFITS. 3. Monopoly profit theory asserts that some...
Please join StudyMode to read the full document