Question 1

The text notes that many firms that use animals in production or advertising adopt the animal treatment standards of the American Society for Prevention of Cruelty to Animals. Why do companies adopt a professional group's standard of behavior?

Accepted Answer

Professional groups such as ASPCA are well respected advocacy groups. Having the stamp of approval from such professional groups can be a practical way to deflect criticism from the press or, ultimately, from customers.

Question 2

Ethics might be defined as virtuous behavior. Clearly, over time, a market economy perceives wealth creation as one form of virtuous behavior. What can go wrong in this process?

Accepted Answer

Wealth creation could involve activities that violate the law. Fraud and other illegal activities reduce the welfare of others and reduce the efficiency of the marketplace. Reputational concerns may reduce illegal activity but are not usually a good substitute for well functioning legal systems in promoting efficient market systems.

Question 3

Economist Jack Hirshleifer notes that, "Altruism economizes on the costs of policing and enforcing contracts." Since economics assumes that people act in a self-interested manner, what could he possibly mean?

Accepted Answer

Increased trust between contracting parties reduces the level of expected opportunistic behavior and make contracts more attractive. Fewer contingencies need be written into contracts and monitoring costs decline. As a result, more contracts are made, and gains from trade increase.

Question 4

Ralph Nader has long argued that large corporations in oligopolistic markets should use their vast productive powers to redress social ills. Implementing this policy may put the company:

Accepted Answer

Ralph Nader's policy of using corporate power to address social issues may conflict with the traditional goal of wealth maximization for corporations. This could lead to resistance from shareholders and executives who prioritize profit over social responsibility. It is less likely to result in conflict with the government, trade unions, or religious groups.

Question 5

Ethics codes in corporate life tend to emphasize (a) compliance with laws and regulations, (b) honesty and integrity, and (c) avoidance of conflicts of interests. Which one is the most important in today's world? How does economics help in understanding its importance?

Accepted Answer

The answer of Ethics codes in corporate life tend to...

Question 6

Martha Stewart seems to have made a bad decision concerning the use of insider information in selling ImClone stock. The resulting negative publicity on the issue caused value of her corporation, Martha Stewart Living, to fall by almost half. This example is supposed to show that:

Accepted Answer

Martha Stewart's case demonstrates that ethics and wealth creation are closely linked. Her unethical behavior in using insider information led to a loss in public trust, negative publicity, and a significant drop in the value of her company. This shows that unethical actions can harm a person's financial success and reputation in the long run. It is important to maintain ethical behavior to ensure sustainable wealth creation.

Question 7

Ethics can be defined as:

Accepted Answer

Ethics refers to the moral principles and values that guide individuals and organizations in determining what is right or wrong. Virtuous behavior aligns with ethical principles, while the other options either do not relate to ethics or do not necessarily align with ethical principles.

Question 8

What are some mechanisms for encouraging ethical behavior?

Accepted Answer

The answer of What are some mechanisms for encouraging ethical...

Question 9

If a manager complies with all laws and regulations, then he can be confident that he:

Accepted Answer

Compliance with laws and regulations does not necessarily equate to ethical behavior. It is only the first step in addressing ethical issues in the workplace. Ultimately, ethical behavior goes beyond legal compliance and involves making morally sound decisions that align with basic moral principles. Therefore, a manager who only complies with laws and regulations has only begun to deal with ethical issues.

Question 10

Citigroup, of which Solomon is one division, was found guilty of unethical behavior in 2003. The separate divisions of brokerage, investment banking, and insurance were coordinated for the benefit of the company, but to the detriment of external investors. This scandal followed the one in the 1990s. Discuss the issues of organization architecture that can lead to recurring corporate scandals like this. What possible changes in organizational architecture might reduce the temptation for managers to cheat in the process of wealth creation?

Accepted Answer

The answer of Citigroup, of which Solomon is one division,...

Question 11

Business norms:

Accepted Answer

Business norms refer to the customary standards of behavior expected within a particular industry or profession. These norms act as guidelines for how individuals should conduct themselves in business settings and are based on ethical and professional principles.

Question 12

Compensating differentials for employees can be seen as one measure as adjusting for:

Accepted Answer

The answer of Compensating differentials for employees can be seen...

Question 13

The key mission of a firm's managers or owners is:

Accepted Answer

The key mission of a firm's managers or owners is to maximize the value of the firm, which ultimately increases the wealth of the shareholders. While ethical behavior and following laws and regulations are important aspects of running a business, they are not the primary goal. Hiring a large number of employees may be important for the growth and success of the firm, but it is not the key mission.

Question 14

In the United States, there are numerous organizations - some sponsored by business and others that are independent of business - that monitor the behavior, the product quality, and the service provided by businesses. What role do these organizations have in the process of promoting ethical behavior?

Accepted Answer

The answer of In the United States, there are numerous...

Question 15

Ethics is about making good decisions. Sometimes it is hard to see what economics has to do with ethics until you remember that economics is often defined as the:

Accepted Answer

Economics is often referred to as the science of choice because it deals with how individuals and society allocate scarce resources to satisfy unlimited wants and needs. This requires making decisions, which can have ethical implications. Therefore, economics and ethics are intertwined.

Question 16

Economist Adam Smith noted that in trade, different ethical standards seem to prevail in different situations. In a market environment where customers will never be seen again, there is a tendency towards:

Accepted Answer

In a market where customers are not likely to be repeat buyers, selfish sellers may tend to prioritize their own short-term gain over long-term reputation and therefore may be more likely to cheat customers on price or quality. This is known as asymmetric information, where the seller has more information about the product than the buyer.

Question 17

Economist Milton Friedman argued that the goal of corporations should be "to make as much money for its owners as possible while conforming to the basic rules of society." What does this mean in terms of corporate ethical behavior?

Accepted Answer

The answer of Economist Milton Friedman argued that the goal...

Question 18

Economist Milton Friedman argued that ethical behavior is really the same as:

Accepted Answer

Milton Friedman argued that the social responsibility of business is to maximize profits within the framework of legal and ethical standards. In other words, ethical behavior is the same as wealth maximization within the bounds of the law and ethical standards.

Question 19

Corporate responsibility may require changing the mission of the company to a 'constrained' wealth maximization. Is it possible for a few firms in the marketplace to shift their objective functions in this way? Why?

Accepted Answer

The answer of Corporate responsibility may require changing the mission...

Question 20

Johnson & Johnson, a personal care products company, has a four-tiered credo or mission. In order, it states its relationship to customers, employees, communities, and, finally, stockholders. This credo seems to increase the ethical behavior of this corporation. Why doesn't it conflict with wealth creation?

Accepted Answer

The answer of Johnson & Johnson, a personal care products...

Quiz 22: Ethics and Organizational Architecture