Chapter 10

Chapter 10 - Chapter 10 Managerial Economic 1) Define the...

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Chapter 10 Managerial Economic 1) Define the firm The firm is a focal point for a set of contracts. 2) Discuss owner/ manager conflicts. At least five sources of conflict arise between owners and managers: Choice of effort: Managers generally increases the value of the firm but managers expend the effort and addition effort reduces manager utility. Perquisite taking: Owners do not want to overpay managers. In contrast, managers are likely to want not only higher salaries but also perquisites such as exclusive club membership, lavish office furniture, luxurious automobiles. . Differential risk exposure: The managers might forgo project that they foresee would be profitable simply because they don’t want to accept the risk that the task might fail and lead to a reduction in their compensation. In contrast, the owners want to take higher risk because the risk is higher that owners can take higher profit because owner typically invests only a small fraction of their wealth in any one firm. Differential horizons:
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Chapter 10 - Chapter 10 Managerial Economic 1) Define the...

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