Economic essay

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Homework 1
Question 1: Use the principles of economics to explain why CEO does not always act at the shareholder’s interest?
Answer:
Generally speaking, Stockholders have the right to hire and fire CEO. The duty of CEO is to maximize stockholders’ wealth (such as stock price). In some corporations, CEO is not the corporation’s stockholder. Therefore, CEO’ interest may be different from stockholder’s interest. Such kind of situation may result in conflicts of interest because of scarcity. In theory, stockholder has significant control over management by annual meeting and the board of directors. In practice, no mechanisms are as effective as theory posits. The power of stockholders is diluted by the following factors.
1. Small stockholders usually absent from annual meeting because the cost of going to meeting exceeds the value of their holdings.
2. Proxies are not voted become the votes of CEO.
3. Some large stockholders may vote with their feet in order to avoid conflicts.
4. Annual meeting is hard for outsiders and rebels to bring up issues.
5. Institutional investors usually go along with incumbent CEO.
6. Directors lack the expertise and willingness to ask the necessary tough questions.
As a result of reasons listed above, CEO does not fear stockholder, CEO will put his interest over stockholder’s interest.

Question 2: In terms of scarcity, what do you think is the scarcest resource in the firm operation? Why? Does your answer change if the economy is hit by another financial crisis?
Answer:
Economics is the study of how society manages its scarcity resources. Scarcity means society’s limited resources cannot serve all the people’s need. I think the scarcest resource in the firm operation is talents. Talents’ abilities usually exceed normal people. They can use unusual strategies and methods to help firm boost working efficient and increase revenue. Meanwhile, a talent is competent to finish several normal employees’ work, so firm can reduce amount of employees, save some space and simplify interpersonal relationship in the firm.
Gifted specialist and managers are both scarce. Money cannot buy everything. Talents are rare and often hard to be satisfied. Firms usually need to pay big price to ensure their loyalty.
My answer will not change if another financial crisis hit the
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