Deck 14: Alternative Theories of the Firm

Question 1

The divorce of ownership and control tends to occur in

A) public limited companies.
B) all firms.
C) partnerships.
D) sole proprietors.

Answer 1

public limited companies.

Question 2

Shareholders usually prefer firms to

A) maximise profit.
B) operate a satisficing system.
C) maximise growth.
D) maximise sales revenue.

Answer 2

maximise profit.

Question 3

The divorce of ownership and control causes a problem usually referred to by economists as

A) principal- agent problem.
B) merger mania.
C) profit myopia.
D) moral hazard.
E) adverse selection.

Answer 3

principal- agent problem.

Question 4

When comparing a growth- maximising firm with a short- run profit- maximising firm, which one of the following (in the short run) is likely for the growth- maximising firm?

A) A higher price elasticity of demand at the price charged by the firm
B) A lower level of investment
C) A lower equilibrium output
D) A lower level of advertising
E) A lower price relative to average cost

Question 5

The theory that managers aim to shift cost and revenue curves in order to maximise profits over a period of years is usually called

A) Marxism.
B) growth maximisation.
C) sales revenue maximisation.
D) long- run profit maximisation.

Question 6

Theories of the firm based upon managerial utility maximisation assume that managers are motivated by

A) meeting targets.
B) profit maximisation.
C) self- interest.
D) pleasing shareholders.

Question 7

According to managerial theories of the firm, which of the following would not cause a managerial utility to increase?

A) Increased monitoring by shareholders
B) Growth in the number of managed staff
C) Increased job security
D) Increased status

Question 8

Williamson suggests that managers might not try to achieve

A) job security.
B) maximum revenue.
C) power over others.
D) maximum profits.
E) respect.

Question 9

Williamson argues that managers would often have the discretion to pursue their own interests and so would seek to maximise their own utility. Which one of the following was not said to be a feature of this situation?

A) Managers would receive higher salaries and spend on company cars or plush offices.
B) The firm's choice of output and price would be no different from a profit- maximising firm.
C) Staffing levels would be higher than under profit maximisation.
D) Managers would exercise some discretion over investment expenditure.
E) Expenditure on staff and managerial perks tends to vary with the business cycle.

Question 10

Sales maximisation is likely to take place in markets that are

A) export- oriented.
B) perfectly competitive.
C) contestable.
D) oligopolistic.

Question 11

A sales- maximising firm will produce where

A) AR minus AC is maximised.
B) sales revenue is maximised.
C) quantity sold is maximised.
D) MR minus MC is maximised.

Question 12

Firms that engage in satisficing behaviour are likely to be

A) like other firms in their industry.
B) growth- maximisers.
C) leading firms in their industry.
D) unlike other firms in their industry.

Question 13

Growth maximisation is the same as

A) maximising the growth of sales revenue.
B) sales revenue maximisation.
C) utility maximisation.
D) sales maximisation.
E) long- run profit maximisation.

Question 14

The setting of multiple targets (with no one objective to be maximised) is most likely

A) when firms operate in highly competitive markets.
B) when there is a limited number of large institutional shareholders.
C) when one of the managers in the company is dominant.
D) when the firm has a complex multi- department organisation.

Question 15

Behavioural theories of the firm concentrate on the ______ interests of_________.

A) conflicting; different parts of the firm
B) common; different parts of the firm
C) conflicting; managers
D) common; managers

Question 16

When economists say that firms have multiple targets, they mean that firms

A) maximise profits.
B) maximise sales revenue.
C) allow organisational slack.
D) create conglomerate mergers.

Question 17

Which of the following will tend to lead to less organisational slack?

A) The firm does not achieve some of its targets
B) The firm does better than planned (in terms of its various targets)
C) Managers become more cautious
D) A less complex organisational structure in the firm
E) A greater degree of uncertainty about future demand

Question 18

According to behavioural theories of the firm, if departmental targets are not met the firm is likely to

A) hold meetings with departments concerned.
B) set new, less demanding targets.
C) try to find out why the targets were not achieved.
D) all of the above

Question 19

Firms build in organisational slack in order to

A) minimise conflict within the firm.
B) maximise growth.
C) cope with unforeseen changes.
D) A and C

Question 20

Theories that attempt to predict the actions of firms by studying the behaviour of various groups within the firm are usually called

A) stakeholder theories.
B) managerial theories.
C) behavioural theories.
D) rational theories.
E) classical theories.

Question 21

Firms that satisfice will typically

A) be more eager to exploit their economic power than profit- maximisers.
B) have less organisation slack than a profit- maximiser.
C) be more responsive to changes in economic conditions than sales revenue- maximisers.
D) be less responsive to changes in economic conditions than profit- maximisers.

Question 22

If firms 'satisfice', this means that

A) long- run profits are maximised.
B) objectives such as profit are not maximised.
C) managers need to be paid enough to stop them leaving the company.
D) sales revenue is maximised.
E) short- run profits are maximised.

Question 23

If a firm uses accountancy cost concepts that are not based on opportunity cost, then it will only be by chance if it succeeds in maximising profits.

Question 24

If firms do not use marginal cost and marginal revenue concepts, they will not be able to arrive at (or close to) their profit- maximising output.

Question 25

The fact that firms may not maximise profits could be an indication of irrational behaviour.

Question 26

The principal- agent problem occurs when managers rather than shareholders control a firm.

Question 27

Asymmetric information will only ever be damaging to one party in any economic transaction.

Question 28

Williamson argues that managers will pursue their own utility and maximise their job security, salary, prestige and professional status.

Question 29

The (profit- satisficing) sales revenue- maximising output will always be greater than the profit- maximising output.

Question 30

The profit- maximising output will never be greater than the (profit- satisficing) sales revenue- maximising output.

Question 31

When firms adopt a satisficing approach with multiple targets, their production is likely to be less responsive to changing market conditions.

Question 32

Behavioural theories of the firm suggest that managers will try to avoid conflict by agreeing targets between them, rather than setting them 'from the top down'.

Question 33

If the number of rival firms decreases, this will tend to lead to a higher level of organisational slack.

Question 34

To avoid constant revision of targets, managers may allow organisational slack to develop.

Question 35

Increasing profits will always be in a manager's best interests.

Question 36

If a firm under perfect competition had an aim other than profit maximisation, would this make any difference to the output it would choose to produce?

Question 37

Explain why a history between firms might lead to a firm deciding not to maximise profits.

Question 38

In what way might each of the following lead to smaller short- run profits but larger long- run profits?
a) A large- scale advertising campaign
b) Opening up a new production line
c) Investing in research and development
d) Launching a take- over bid for a rival company
e) Installing expensive filter equipment to reduce atmospheric pollution from the factory's chimneys

Question 39

What variables are likely to influence managerial utility?

Question 40

If in the short run a firm could maximise sales revenue and make more than the satisfactory level of profit, this situation would be unlikely to persist in the long run even if other firms were prevented from entering the industry. Why?

Question 41

Why does an unwanted take- over become more likely when a firm expands rapidly?

Question 42

It is claimed that growth through diversification is beneficial for a firm because it allows the spreading of risks. Explain why.

Question 43

Is it possible for a firm to maximise two objectives simultaneously?

Question 44

Define organisational slack.

Question 45

Junior managers frequently complain that they are faced with new targets from above which makes their life very difficult. If their complaint is true, does this conflict with the hypothesis that managers will try to build in slack?

Question 46

Explain the term 'profit satisficing'.

Question 47

Draw a set of MC, AC, MR and AR curves for a price- making firm. Mark on the profit- maximising position and the sales revenue- maximising position.

Question 48

How could consumer welfare be influenced by firms satisficing?