Check whether the contract is aligned to the incentives with the owner’s profit goals.

Question

a manager's incentives are not perfectly aligned with the profit-maximising goals of a firm's owners, one plausible scenario is that they may have an incentive to maximise the firm's total revenue (if for example their income is proportional to revenue). Explain why the revenue maximiser should always produce more than the profit maximiser.

Answer 1

Question

Chapter 1, Problem 1.2IP

To determine

Check whether the contract is aligned to the incentives with the owner’s profit goals.

Expert Solution & Answer

Trending nowThis is a popular solution!

See solution

Check out sample textbook solution

Students have asked these similar questions

a manager's incentives are not perfectly aligned with the profit-maximising goals of a firm's owners, one plausible scenario is that they may have an incentive to maximise the firm's total revenue (if for example their income is proportional to revenue). Explain why the revenue maximiser should always produce more than the profit maximiser.

Teletronics reported record profits of $100,000 last year and is on track to exceed those profits this year. Teletronics competes in a very competitive market where many of the firms are merging in an attempt to gain competitive advantages. Currently, the company’s top manager is compensated with a fixed salary that does not include any performance bonuses. Explain why this manager might nonetheless have a strong incentive to maximize the firm’s profits

Ben Bates graduated from college six years ago with a finance undergraduate degree. Although he is satisfied with his current job, his goal is to become an investment banker. He feels that an MBA degree would allow him to achieve this goal. After examining schools, he has narrowed his choice to either Wilton University or Mount Perry College. Although internships are encouraged by both schools, to get class credit for the internship, no salary can be paid. Other than internships, neither school will allow its students to work while enrolled in its MBA program. Ben currently works at the money management firm of Dewey and Louis. His annual salary at the firm is $65,000 per year, and his salary is expected to increase at 3 percent per year until retirement. He is currently 28 years old and expects to work for 40 more years. His current job includes a fully paid health insurance plan, and his current average tax rate is 26 percent. Ben has a savings account with enough money to cover the…