Eco 550 Week 1

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Week 1 Assignment Chapter 1 Q 2, 3, 6 2. The principal agent problem occurs when the principals delegate decision making authority to the agents. The agents often seek acceptable levels of profit and shareholder wealth while pursuing their own self interests. Self-interest can lead managers to focus on their own long term job security. The compensation committee of the board should align incentives for management with shareholder interest. Long term incentives such as stock options align company performance and stockholder value with executive’s personal goals. Long term incentives would also create management retention and should be based on corporate profitability. 3. Executive bonuses for that year would trigger at or below 10% decline, as long as corporate profitability starts stabilizing. Some issues that may arise are; being unable to meet goals due to poor economy, having smaller bonuses due to the decline of corporate profit. Executive salary lacks incentive for performance therefore bonuses or long term incentives have to be part of compensation. 6. Explain a) A. New foreign competitors would take away market share and would decrease corporate profits and stock value. b) B. If strict pollution control requirements are enacted, companies will incur higher cost for implementing new measures to reduce pollution. c) C. A nonunion work force allows a corporation more freedom of movement. A unionized work force has restrictions, allows workers to strike and create work stoppages, higher wages may be paid to workers which would affect corporate profitability. d) D. Inflation deteriorates the value of money, the company can afford to buy less materials/workforce with the same amount of capital as before. e) E. A technological breakthrough would reduce cost of production creating competitive advantage and long term

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