7.3

• Profit Maximization:

  • Economists assume that firms choose how much to produce to maximize profits. This is the traditional view.
• not all firms are solely focused on monetary profit. For example, a sole owner may prioritize job satisfaction or work-life balance over profit. They may continue running their business even if they could earn more by working elsewhere because they value their freedom or personal satisfaction.
• Large firms are typically run by a board of directors, not the owners themselves. This creates a separation between those who own the firm (shareholders) and those who make the business decisions (directors).
• • Principal–Agent Problem:
  • This occurs when the agents (directors) have different incentives from the principals (shareholders).
  • Directors may prioritize their own interests (such as securing higher salaries or growth) instead of maximizing profit for shareholders.
• Hostile Takeovers:

  • A hostile takeover occurs when an outside firm buys enough shares of a company to gain control, even if the target company does not want to be sold.
• • Hostile takeovers usually happen when the target company's shares are undervalued, meaning that the firm is not maximizing profits. The acquiring company can buy shares cheaply, take over the management, and implement changes to improve profitability.
• • The threat of a hostile takeover often motivates managers to focus on maximizing profits to keep the company from being undervalued and vulnerable.