Th3.2: Satisficing

Question 1

What happens due to the principal agent problem?

Answer 1

owners and directors will have different goals

Question 2

What will a directors goal be?

Answer 2

directors will want to maximise their own benefits but will need to make a certain amount of profit in order to keep their jobs, receive benefits and avoid criticism from shareholders/the press

Question 3

Therefore, managers are likely to follow the objective of profit satisficing:

Answer 3

they will make enough profit to keep owners happy whilst following other objectives and not profit maximising

Question 4

What are these ‘other objectives’ likely to be?

Answer 4

their own benefits, for example increased their own salaries which increases costs and therefore decreases profit

Question 5

The amount of profit needed will change year on year and will depend on…

Answer 5

the level of profit made by other firms - if everyone else is making a loss, and the firm only managers normal profit then this will be good enough for shareholders but if other firms are making huge profits, shareholders too will expect great profits