Objectives of firms 2

Question 1

define principal-agent problem

Answer 1

Arises from conflict between objectives of business owners and agents who take decisions on their behalf

Question 2

Define social welfare

Answer 2

A firm existing to benefit wider society

Question 3

Define corporate social responsibility (CSR)

Answer 3

A firm acting to benefit wider society, the community or their employees

Question 4

Define profit satisficing

Answer 4

Manegers making satisfactory profits to satisfy shareholders

Question 5

Explaining the principal agent problem

Answer 5

Principals are shareholders whilst agents are managers. Shareholders hold pressure over managers in the form of AGMs and performance related pay to incentivise. Asymmetric information may mean that principals don’t view agents as profit maximisers, and therefore aren’t happy if they are profit satisficing. They may not be trying to achieve the same objectives

Question 6

Why are objectives important?

Answer 6

Owners can minimise the principle agent problem by aligning the objectives of shareholders with the objectives of managers with performance related pay incentives. Managers incentivised to maximise profits because it has a direct effect on their renumeration.