Difference between profit maximization and shareholder wealth maximization

1. Discuss the difference between profit maximization and shareholder wealth maximization. Which of these is a more comprehensive statement of a company's economic objectives?

2. Briefly discuss the Coase theorem. What does this theory imply about the role of government in dealing with market externalities?

3. Question not applicable (No Answere needed)

4. Question not applicable (No Answere needed)

5. Mr. Lee operates a greengrocery in a building he owns in one of the outer boroughs of New York City. Recently, a large chemical firm offered him a position as a senior engineer designing plants for its Asian operations. (Mr. Lee has a master's degree in chemical engineering.) His salary plus benefits would be $95,000 per year. A recent annual financial statement of his store's operations indicates the following:

Revenue $625,000
Cost of goods sold 325,000
Wages of workers 75,000
Taxes, insurance, maintenance 30,000
and depreciation on building
Interest on business loan (10%) 5,000
Other miscellaneous expenses 15,000
Profit before taxes $175,000

If Mr. Lee decides to take the job, he knows that he can sell the store for $350,000 because of the goodwill built with a steady clientele of neighborhood customers and the excellent location of the building. He would still hold on to the building, however, and he knows he could earn a rent of $50,000 on this asset. If he did sell the business, assume he would use some of the proceeds from the sale to pay off his business loan of $50,000. He could then invest the difference of $300,000 (i.e., $350,000 - $50,000) and expect to receive an annual return of 9 percent.

Should Mr. Lee sell his business and go to work for the chemical company?

In answering this question, also consider the following information:

a. In his own business, Mr. Lee works between 16 and 18 hours a day, 6 days a week. He can expect to work between 10 and 12 hours a day, 5 days a week, in the chemical company.

b. Currently, Mr. Lee is assisted by his wife and his brother, both of whom receive no salary but share in the profits of the business.

c. Mr. Lee expects his salary and the profits of his business to increase at roughly the same rate over the next 5 years.

6. In the following list are a number of well-known companies and the products that they sell. Which of the four types of markets (perfect competition, monopoly, monopolistic competition, and oligopoly) best characterizes the markets in which they compete?

a. McDonald's?hamburgers

b. Exxon Mobil?gasoline

c. Dell?personal computers

d. Heinz?ketchup

e. Procter & Gamble?disposable diapers

f. Kodak?photographic film

g. Starbucks?gourmet coffee

h. Domino's?pizza

i. Intel?computer chip for the PC

Solution Summary

The difference between profit maximization and shareholder wealth maximization is highlighted.