Question

2. Explain the implications of the agency problem for the theory of the firm.

Answer 1

Answer:

i. Forecasting Demand:

Forecasting refers to predicting the future level of sales on the basis of current and past trends. This is perhaps the most important use of demand stud­ies. True, sales forecast is the foundation for plan­ning all phases of the company’s operations. There­fore, purchasing and capital budget (expenditure) programmes are all based on the sales forecast.

ii. Manipulating Demand:

Sales forecasting is most passive. Very few com­panies take full advantage of it as a technique for formulating business plans and policies. However, “management must recognize the degree to which sales are a result only of the external economic environment but also of the action of the company itself.

Answer 2

Answer:

An agency problem is a conflict of interest that occurs in any relationship in which one party is expected to act in the best interests of the other. When an agent is presented with incentives or motivations to act in the best interests of a principal, agency problems arise.

Explanation:

• Many authors have discovered that ownership and control separations, conflicts of interest, risk aversion, and information asymmetry are the leading causes of agency problems; however, it has been discovered that ownership structure, executive ownership, and governance mechanisms such as board structure can reduce agency costs.
• When conflicts of interest prevent one party from acting in the best interests of another, the agency problem occurs. You can reduce the likelihood of this happening in your business by taking specific steps and staying organized.

Thus this is the answer.

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