Microeconomic Homework
Chapter 2
Q5: Explain the term satisfice as it relates to the operations of large corporation.
The argument is that today’s large corporations do not aim to maximize profits but instead, their aim is to satisfice. The two parts of this idea that we must consider are the following: The position and power of stockholders in today’s corporation as opposed to the position and power of professional management in today’s corporation. Large corporations today are not managed by the owners or the shareholders. The argument states that most stockholders will be satisfied with an adequate dividend and some reasonable growth. Since most stockholders own a variety of stocks, they are more concerned with their portfolio of stocks rather than a particular stock. Also, shareholders may not be capable of knowing whether management is doing their best for them, but they may not be very concerned so long as they receive what they consider to be a satisfactory return on their investment, hence the term “satisfice.”
Q6: Discuss the meaning of the term “principle-agent problem.” Why does this problem exist?
The principal-agent problem arises when management’s objectives are contrary to the objectives of stockholders. For example, management may be more interested in revenue growth or in maximizing their own income rather than maximizing profits in the interests of stockholders. The divergence in objectives between owners and management is known as the “principal-agent” problem. When stockholder and management goals differ, the corporation’s management may not act in the best interest of the stockholders but instead act in their own favor due to their selfish motives while keeping the stockholder satisfied with adequate return and moderate growth.
Q8: What are some of the forces that cause managers to act in the interest of shareholders?
There are many forces that cause managers to act in the interest of shareholders.
a) Managers are susceptible to pressure. If stocks are
Q5: Explain the term satisfice as it relates to the operations of large corporation.
The argument is that today’s large corporations do not aim to maximize profits but instead, their aim is to satisfice. The two parts of this idea that we must consider are the following: The position and power of stockholders in today’s corporation as opposed to the position and power of professional management in today’s corporation. Large corporations today are not managed by the owners or the shareholders. The argument states that most stockholders will be satisfied with an adequate dividend and some reasonable growth. Since most stockholders own a variety of stocks, they are more concerned with their portfolio of stocks rather than a particular stock. Also, shareholders may not be capable of knowing whether management is doing their best for them, but they may not be very concerned so long as they receive what they consider to be a satisfactory return on their investment, hence the term “satisfice.”
Q6: Discuss the meaning of the term “principle-agent problem.” Why does this problem exist?
The principal-agent problem arises when management’s objectives are contrary to the objectives of stockholders. For example, management may be more interested in revenue growth or in maximizing their own income rather than maximizing profits in the interests of stockholders. The divergence in objectives between owners and management is known as the “principal-agent” problem. When stockholder and management goals differ, the corporation’s management may not act in the best interest of the stockholders but instead act in their own favor due to their selfish motives while keeping the stockholder satisfied with adequate return and moderate growth.
Q8: What are some of the forces that cause managers to act in the interest of shareholders?
There are many forces that cause managers to act in the interest of shareholders.
a) Managers are susceptible to pressure. If stocks are