Alternative Goals of Firms

Question 1

What are the 3 advantages of revenue maximization?

Answer 1

1. Sales are more easily identified and give the feeling of success (could be used to motivate employees)
2. Rewards for managers linked to sales than profit
3. Often assumed that revenue from more sales will increase more rapidly than costs

Question 2

What are the advantages of growth maximization?

Answer 2

1. Achieving economies of scale
2. Diversify into production of different products (reducing dependency on a single product)
3. More market power
4. Lower risks of take-overs by other firms
5. Reconciles the interests of both owners and managers

Question 3

What is managerial utility maximization?

Answer 3

Large firms run by managers who are not owners may try to maximize their personal utility

1. Higher salaries and fringe benefits (company cars)
2. Employment of more staff (morale)
3. Investment into manager’s favorite projects

Question 4

What is satisficing?

Answer 4

H Simon argues that the multiplicity of objectives in modern large enterprises does not allow a firm to pursue any kind of maximizing behavior. Rather, firms should pursue many objectives that are placed in hierarchy, trying to achieve satisfactory levels by making compromises and reconciling conflicts.

Question 5

What is corporate social responsibility?

Answer 5

It is the avoidance of activities that may lead to negative production externalities such as pollution, child labor, or hazardous working conditions.

The negative image created through such externalities reduces a firm’s profits, and thus such firms are encouraged to be socially responsible.

Question 6

What are examples of corporate social responsibilities?

Answer 6

1. Avoidance of polluting activities and engaging in environmental friendly practices
2. Support for human rights
3. Art and athletic sponsorship
4. Donations to charities