Question 1

The divorce of ownership and control tends to occur in

Accepted Answer

The divorce of ownership and control is a characteristic feature of public limited companies, where ownership is spread among numerous shareholders while control is typically concentrated in the hands of a board of directors and executive management. This separation is less prevalent in partnerships and sole proprietorships, where owners are often directly involved in management.

Question 2

Shareholders usually prefer firms to

Accepted Answer

Shareholders typically prefer firms to maximize profit as this often leads to an increase in the value of their shares and potentially higher dividends.

Question 3

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

Accepted Answer

The principal-agent problem arises when there is a conflict of interest between the owner (principal) and the manager (agent) of a company, which is a common issue when ownership and control are separated.

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?

Accepted Answer

Growth-maximising firms often focus on expanding their market share and customer base, which can involve setting lower prices relative to their average costs to attract more customers and increase sales volume. This strategy can sacrifice short-term profits for long-term growth.

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

Accepted Answer

The theory that managers aim to shift cost and revenue curves to maximize profits over a period of years is referred to as long-run profit maximisation. This approach focuses on achieving the highest possible profit in the long term, rather than prioritizing short-term gains or other objectives such as sales volume or market share.

Question 6

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

Accepted Answer

Theories based on managerial utility maximization assume managers are motivated by self-interest, which can include a variety of personal goals not necessarily aligned with profit maximization or shareholder interests.

Question 7

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

Accepted Answer

Increased monitoring by shareholders typically restricts managerial freedom, potentially reducing their utility, as it may limit their ability to pursue personal goals that are not aligned with shareholder wealth maximization.

Question 8

Williamson suggests that managers might not try to achieve

Accepted Answer

Williamson suggests that managers might not try to achieve maximum profits, as they may prioritize other goals such as job security, power, or personal satisfaction over profit maximization.

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?

Accepted Answer

Williamson's model suggests that managerial utility maximization can lead to different outcomes from those of a profit-maximizing firm, including higher staffing levels and discretionary spending, but not necessarily the same choice of output and price.

Question 10

Sales maximisation is likely to take place in markets that are

Accepted Answer

In oligopolistic markets, firms may focus on sales maximisation to increase market share and deter entry by competitors, as they have some control over prices and output.

Question 11

A sales- maximising firm will produce where

Accepted Answer

A sales-maximising firm focuses on the point where its total sales revenue is at its highest, not necessarily where profit (AR minus AC or MR minus MC) is maximised or where the quantity sold is maximised without regard to revenue.

Question 12

Firms that engage in satisficing behaviour are likely to be

Accepted Answer

Satisficing behavior in firms typically involves making decisions that meet acceptable thresholds or criteria rather than optimizing for the best possible outcome. This approach can lead to firms being similar to others in their industry, as they may adopt common practices or standards that are deemed satisfactory.

Question 13

Growth maximisation is the same as

Accepted Answer

Growth maximisation refers to the strategy of maximising the growth of sales revenue, which is often pursued by firms looking to increase their market share and expand their operations.

Question 14

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

Accepted Answer

When a firm has a complex multi-department organization, it is likely to have multiple targets because different departments may have different objectives and priorities that need to be balanced.

Question 15

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

Accepted Answer

Behavioral theories of the firm, such as those proposed by Cyert and March, focus on how different parts of an organization often have conflicting interests, goals, and objectives, rather than a unified, common goal. This perspective emphasizes the complexity and diversity of motivations within a firm.

Question 16

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

Accepted Answer

Firms allow organizational slack to provide a buffer against uncertainty and to allow for flexibility in decision-making.

Question 17

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

Accepted Answer

A less complex organisational structure in the firm will tend to lead to less organisational slack.

Question 18

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

Accepted Answer

Behavioral theories suggest that firms will engage in various actions to address unmet targets, including holding meetings, setting new targets, and investigating reasons for failure.

Question 19

Firms build in organisational slack in order to

Accepted Answer

Organisational slack can help minimize conflict within a firm by providing a buffer that allows for flexibility in resource allocation and decision-making. It also helps the firm cope with unforeseen changes by having extra resources that can be allocated as needed, thus enhancing adaptability and resilience.

Question 20

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

Accepted Answer

Behavioural theories focus on understanding the actions of firms by examining the behaviour of individuals and groups within the organization, rather than assuming purely rational decision-making.

Quiz 14: Alternative Theories of the Firm