Discuss owner-manager conflicts; value maximizing principle, Nash equilibrium
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1) Discuss the owner-manager conflict within the firm. Provide two real world
manifestations of the conflict.
2) Discuss the value-maximizing principle. How are reputational concerns related to this
principle?
3) Define the Nash equilibrium. Why is this concept applicable to many oligopoly
industries?
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1) Discuss the owner-manager conflict within the firm. Provide two real world
manifestations of the conflict.
Ans- Owner provides the firm with capital and initial planning. But
whether a owner can be a manager depends on the size of the firm and
the abilities of the owner. It is often said that managers are not
made but are born. A small firm which cannot afford the services of a
specialized manager, can be managed by the owner himself.
An owner wants to maximize profits but a manager wants to maximize the
wealth. An owner in order to maximize profit can indulge into
profiteering, but a manager will never indulge into such practices.
The manager will look to maximize the wealth of the owner and not just
maximization of profit. This approach of owner and manager results
into conflicts.
In real world, in case of joint stock companies, the firm is run for
the maximization of share value. In real world, every business has to
look after the interests of shareholders, government, ...
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