Question

Hi can someone answer this for me please in detail, was answered before but wrong and not explained properly thank you so much

4. In the theory of the firm, what is the nature of the principal-agent problem when there is a separation of ownership and management, and why is this an issue? Using the sales-maximization model of Baumol, examine the conditions under which the firm produces an output that is different from the profit-maximizing level. Show that a tax on the sales-maximizing firm's profits may cause it to cut output, but that in the other theories of the firm, profit taxes can actually lead to an increase in output, and explain.

Answer 1

The Nature of the principle - agent problem is differences between organization of twities Loctions and organization objective due to a separation of ownership and management. An agent who has power of decision making, take those actions which are correct from his point of view but not in accordance with from / organization defined or determined objectives The Sales - maximization model of Baumol, from /orforindan is aims at maximizing its Saks - Revenue rather tham maximizing its profit. The condition under which the firm produce an output is at the devel, where the change in total revene (TR) due to additional unit of production is exactly equals to zero. Cie) ITR - 0 Production Condition by using 4 d X I the Sales-maximization model of Bund We Can Show with the help of the sales maximization model of baumol that, a tax on the sales- maximizing from's profts may cause it to cut output, but that in the other theosies of the firm, profit taxes on actually lead to an increase in output.

1 Total Cast dat-o a A Total cost Total Revenue Bolit (17) d TR 70 Total Revenue ..---- TT A lotel DDA, TTS Total Botit te - >output CX Where, XiT = output of profft matiniary Before tal X = After tat oupet af profit modimizing TT = Profit of protit- maximizing Behore- tool T = Proht of polit- maxinnry After tax TS = profit of post-moximizry Before tox TS = Bohit of sales - matiniary After tax It ich shown in above diagram that, proht tax pritially increases from output from xe, to xe but at t theore dТR in less than zero. Therelore, it FLETE En E may cause the from to cut its orput. Similarly, profit tax increases prelit maximizing from Xit to XT. At xt the ITR is than zen. Those fose, it may da cause from to increase its output. from output more the