| What is Baumol’s sale revenue maximization model? | Maximizing organizations sales revenue subject to a minimum profit constraint. |
| What is Marri’s growth maximization model | Managers tend to strive for growth rather than profit maximization. For a given product range, growth is constrained:
• Managerial constraint: rapid growth through diversification may lead to declining profitability.
• Financial constraint: growth of capital requires financing, and it is limited:
- Borrowing: increase debt-equity ratio and risk
- Issue new share capital: acceptable present and future profitability
- Retained profit: trade-off with dividends
• Growth of demand: firm’s chosen growth rate of demand and its profitability
• Maximum growth of capital: firm’s rate of profit and the maximum rate at which capital grows
• Point A and B profit and growth maximization respectively |
| What is Williamson’s theory of managerial utility maximization? | The managerial utility function: U=f(S,M,π_D). Meaning, managers derive personal utility from things other than profits or sales:
- Staff (S). Likes to have power over many employees (empire building)
- Perks (M). Large office, company car, dinners, etc.
- Discretionary profit (π_D): the higher this profit, the higher the payout to owners, the more secure the manager’s job is.
The manager faces a constraint: π_D=π(S)-(M+T)-π_0 where T = tax and π_0= owners’ minimum acceptable profit.
We can see the model below, characterized by:
- Diminishing returns: π(S) is first increasing but eventually declines.
- Profit maximization: staff expenditure S1 and discretionary profit π_(D_1 )
- Utility maximization: staff expenditure S2 and discretionary profit π_(D_2 ) |
