Chapter 12: Objectives of business

Question 1

Define principle-agent problem

Answer 1

It arises from conflict between the objectives of the principles and their agents who take decisions on their behalf

Question 2

Define x-inefficiency

Answer 2

It occurs when a firm is not operating at minimum cost, perhaps because of organisational slack

Question 3

Define bounded rationality

Answer 3

A situation in which firms ability to take rational decisions is limited by a lack of information or an inability to interpret the information that is available

Question 4

Define satisficing

Answer 4

Behaviour under which the managers of the firm aim to produce satisfactory results for the firm (in terms of profit) rather than trying to maximise them

Question 5

Define corporate social responsibility

Answer 5

Actions that a firm takes in order to demonstrate its commitment to behaving in the public interest

Question 6

Define productive efficiency

Answer 6

When a firm operates at minimum average cost, choosing an appropriate combination of inputs and producing the maximum output possible from those inputs

Question 7

Define static efficiency

Answer 7

Efficiency at a particular point in time given the resources and technology available