Shareholder & Manager Profit Alignment

The assignment examines the challenges of aligning profit interests between shareholders and managers. It discusses how companies can structure compensation schemes, such as deferred stock options, to incentivize managers while ensuring shareholder value is maximized. The text provides examples of successful companies implementing such strategies, including Procter & Gamble.

Running head: MANAGERIAL ECONOMICS
Managerial Economics
Name of the Student
Name of the University
Author note

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Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................3
Answer 3..........................................................................................................................................4
Answer 4..........................................................................................................................................5
Answer 5..........................................................................................................................................6
References........................................................................................................................................8

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Answer 1
In today’s world, people have become increasingly health conscious. This raises
consumption tendency towards a low calorie food. Personal consumption of low calories frozen
food is increasing. Schools, Restaurant and other places also aim at offering healthy food. With
increasing preference for low calorie food, company owner may think of increasing their profit
prospects. In order to increase profit, company can make an upward revision of their product
price. However, to be successful in their goal of achieving a high profit the demand should be
inelastic. In case of elastic demand, an increase in price leads to a much higher quantity
reduction, which hurt company’s revenue and hence profit. Therefore, strategies are to be
designed to make demand price inelastic (Jiang, Lee & Zomaya, 2016).
Demand is inelastic for necessary product that is products without which consumers need
in their daily life. Their routine like is hampered without such products (Özdemir et al.,2016).
However, for low calorie frozen good it is very unlikely to have such situation. The analysis of
demand function has revealed that demand for low calorie frozen food depends on different
factors other than its price. These are price of its competitor’s product, advertisement
expenditure and income of the consumers. Structure of low calorie frozen food industry is
similar to that of a monopolistically competitive market. From the calculated elasticity, it is
observed that elasticity is a relatively low for low calorie microwavable goods.
The only way to maintain a low elasticity of their product is to keep on differentiating its
product from other competitors in the industry. The more its product is dissimilar to other
available product lower will be the elasticity. They can improve their packaging of their product
to make the product look different. Products can be differentiated by changing origin of the

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product, brand promotion, by adding some additional ingredients, to attract more consumers the
company can give some attractive offer like give some related product as free and so on (Coase,
2013). Higher differentiation leads to higher market power and make elasticity feasibly less as
possible.
Answer 2
In case of a perfectly competitive market, the market performs best when left free. In any
form of imperfect competition like monopoly, monopolistic competition or oligopoly sellers
have some extent of market power. It is generally believed that government should not intervene
in a market economy because intervention leads to inefficiency in the market. However, there are
situations where government needs to intervene to ensure compatibility.
Government designs regulation to ensure a competitive environment in the market.
Depending on time, government changes rules and regulatory framework. Businesses are often
forced to operate their business within the regulatory framework. The regulation and economic
policy of state, federal or local government should abide by the imposed regulation (Bernstein,
2015). This affects profitability of the business corporations and hence affects the factor markets
specially labor demand. There are general laws that are applied to all industries. Some laws are
applied to only some specific industry. Environment goal is often given priority in designing
regulation. Government can force company to install new technology. The new technology is
costly than earlier. Hence, though it increases the production but may reduce the demand for
labor. Similarly, imposition of profit or sales tax reduces profitability by increasing cost. This
leads to contraction of production activity and hence results in job loss (Stiglitz & Rosengard,
2015).

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Government regulation affects the low calorie frozen food company in the similar way. If
government imposes a profit tax on the industry, then the concerned company as well as other
competitors also considers a upward revision to recover the tax amount. However, the specific
impact depends on the type of regulation imposed on the company. The regulation can also be
taken in terms of fixing a reference amount to make sure any alternate or substitute good in the
industry are sold at a similar price. This will reduce company’s profit from product
differentiation and hence affect strategic and management decision of the firm.
Answer 3
Objective of government regulation is correct any type of market imperfection by
securing right distribution of goods among the consumers. There are situations where people fail
to take best decision to secure their own interest. Before implementing regulation, government
must find out the areas of overall social interest. In market economy government intervention is
needed to protect is from resulting inefficiencies (Boddewyn, 2015). In the low calorie frozen
food industry, there are possibilities of merger and resulting monopoly that leads to consumer
exploitation. With mergers there will be considerable market power for one group. It then
supplies low quality good at a high price. Here, government responsibility is to prevent rise of
monopoly power by eliminating possibility of such mergers. In a monopolistically competitive
market like that in low calorie frozen food industry, there is always unused or excess capacity.
Therefore, regulation is needed to reach at that optimal point. Regulation ensures price stability.
Otherwise, with free entry in the industry, competition will increase resulting in a much lower
price.

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Two examples of market where US government makes intervention are decision to
regulate market is baking industry and natural monopoly and in some manufacturing industry. In
the presence of externality, government’s intervention becomes necessary. In manufacturing
industry some industry, generate too much smog. This increases the pollution level for the
nation. To counter pollution and resulting negative externality US government intervenes. Wide
range goods from these industries are now regulated under US environment law with strict
enforcement of such laws (Bagwell & Lee, 2015). For banking industries or natural monopolies,
US government secures customer interest from unfair practices like mergers or cartel formation.
Answer 4
Successful expansion of business depends on a number of factors. Consideration should
be given on factors such as associated risks, investment return and cost recoveries. For expansion
through capital projects, the central issue is finding the source for additional capital. Completion
of capital projects often seems to be very expensive. It need additional workers to operate fully
the projects and thus increases wage cost (Gillespie, 2014). To arrange the additional capital the
company can either sell some stocks or go for a loan. In both the cases, company decision may
clashes with investors or other stakeholders’ decision.
When business expands then it becomes difficult for the existing workers to handle the
additional workload. This increases turnover rate in the industry. Some workers leave their jobs
in pressure of new responsibilities. Increasing turnover rate hampers regular production and
other management decision. High failure rate is associated with rapid business expansion. The
fact that high cost of capital project and high failure rate makes investment more risky (Bierman
& Smidt, 2014).

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Before consider expansion of business the low calorie frozen industry should consider
such complexities and design suitable strategies. In order to execute business expansion
managers in the concerned firm should make plan for alternative projects to generate more
capital and minimize the associated risk. Before go for capita project, proper estimation of cost is
required. The firm can make an estimation of cash flows for such projects following some ways.
Firstly, cash flow stream should be estimated as a difference between flow of cash with
considering investment projects and without such investments. The tax estimate should be
included while computing cash flow. However, certain cost like sunk cost should be excluded
from such estimates (Coppola, Fernholz & Glenday, 2014). If all these issues can be taken for
consideration then the firm can overcome the complexities associated with capital projects.
Answer 5
When firm considers expansion by undertaking capital projects then there are possibility
of an obvious conflict between stakeholders and mangers. These conflicts should be resolve. The
most important problem here is the distributing profit shares among company’s shareholders and
managers. The additional profits are distributed among the shareholders as debenture while the
managers get it as a bonus (Kerzner, 2013). Strategy should be taken in way that will serve the
interest of both groups.
The company can provide its managers with a deferred stock. These stocks are purchased
by the holder at a discounted rate and thus increase their profit potential. In this way, their profit
shares become dependent on managers’ profit who receive bonus for performing well. When
performance of firm improves then value of invested capital rises and benefits both the groups.

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There are famous companies that follow this strategy and successfully expand their
business. One example of such company is Procter and Gamble. The brand includes a wide range
of products. They adapt the strategy of providing a fixed baseline fees and a performance bonus
to maintain a synergy of interest among different groups. Fortune 500 pursued the strategy of
deferred stock sales in 2009. It is also known as option based sales. The estimated value of
company’s share is dollar 7 million. Of which 71% is offered as a deferred stock. In P&G, Ford
executives in the accounting section receive only fixed salary in case of accounting an average
performance and fail to make additional improvement for company sales (Wheelen & Hunger,
2017). On the other hand, they can earn millions of dollar as bonus in case they make additional
effort for campaigning and this gives fruitful result in improving sales and profit.

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References
Bagwell, K., & Lee, S. H. (2015). Trade policy under monopolistic competition with firm
selection. Mimeogr., Stanford University.
Bernstein, M. H. (2015). Regulating business by independent commission. Princeton University
Press.
Bierman Jr, H., & Smidt, S. (2014). Advanced capital budgeting: Refinements in the economic
analysis of investment projects. Routledge.
Boddewyn, J. J. (2015). Political aspects of MNE theory. In The Eclectic Paradigm (pp. 85-110).
Palgrave Macmillan UK.
Coase, R. H. (2013). The problem of social cost. The journal of Law and Economics, 56(4), 837-
877.
Coppola, A., Fernholz, F., & Glenday, G. (2014). Estimating the Economic opportunity cost of
capital for public investment projects: an empirical analysis of the Mexican case.
Gillespie, A. (2014). Foundations of economics. Oxford University Press, USA.
Jiang, Q., Lee, Y. C., & Zomaya, A. Y. (2016). Price Elasticity in the Enterprise Computing
Resource Market. IEEE Cloud Computing, 3(1), 24-31.
Kerzner, H. (2013). Project management: a systems approach to planning, scheduling, and
controlling. John Wiley & Sons.

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Özdemir, Ö., Munoz, F. D., Ho, J. L., & Hobbs, B. F. (2016). Economic analysis of transmission
expansion planning with price-responsive demand and quadratic losses by successive
LP. IEEE Transactions on Power Systems, 31(2), 1096-1107.
Stiglitz, J. E., & Rosengard, J. K. (2015). Economics of the Public Sector: Fourth International
Student Edition. WW Norton & Company.
Wheelen, T. L., & Hunger, J. D. (2017). Strategic management and business policy. pearson.