Ownership and Control

1. A more significant reason to question the assumption of profit maximization is that large firms are not run by their owners. A large company is run by a salaried board of directors and by the managers this board appoints. Although at the annual meeting the shareholders have the opportunity to dismiss the board, in practice this happens rarely. The directors are the experts with the information; it is hard for the shareholders, even in bad times, to be sure that different directors would raise the profitability of the company.

2. Economists call this a separation of ownership and control. Although the shareholders clearly want the maximum possible profit, the directors who actually make the decisions have the opportunity to pursue different objectives. Do the managers and directors have an incentive to act other than in the interests of the shareholders?

3. Managers' salaries are usually higher the larger is the firm. Some economists have argued that this leads managers to aim for size and growth rather than the maximum possible profit. For example, such managers might spend large sums on advertising even though this secured only a relatively small addition to total sales.

4. Nevertheless, there are two reasons why the assumption of profit maximization is a good place from which to begin. Even if the shareholders cannot recognize that profits are lower than they might be, other firms with experience in the industry may catch on faster. If profits are low, share prices will be low. By mounting a take-over, another company can buy the shares cheaply, sack the existing managers, restore profit-maximizing policies, and make a handsome capital gain as the share prices then rise once the stock market perceives the improvement in profits.

5. Alternatively, being aware of the opportunity for managerial discretion, shareholders may try to ensure that the interests of the managers and the shareholders coincide. By giving senior managers a quantity of shares that is small relative to the total number of shares but large relative to managerial salaries, shareholders can try to ensure that senior managers care about profits as much as other shareholders do.

6. For these reasons, the assumption that firms try to maximize profits is more robust than might first be imagined. We now use this assumption to develop the theory of supply.

Задание 4.

I. Откройте скобки, употребив глагол в правильной вре­менной форме.

1. The boy (to refuse) __________to admit that he (to break) ______________the window. So he (to send) _________________home to bring his parents to school.

2. Look, it (to get) ____________late. I (to miss) ____________the ten o'clock train if I (not to hurry) _______________Jack said he (to come) _______________to pick me up. I don't know why he

(not to appear) _________________ yet. Perhaps he (to get) _______________into the traffic jam.

3. Yesterday Tom and Janice (to go) ______to the zoo. They had an adventure there. While they (to walk) _______________by the giraffe, it (to begin) ________to chew Janice's hat.

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