Solution Manual For Essential Economics for Business, 7th edition John Sloman, Elizabeth Jones

Solution Manual For Essential Economics for Business, 7th edition John Sloman, Elizabeth Jones

Chapter 1
1. Compare and contrast the relative strengths and weaknesses of the partnership and the public
limited company.
Partnerships, where two or more people own a business, in most cases have unlimited liability
(there are, however, some limited liability partnerships). With unlimited liability the business’s
losses are the partners’ losses. Such partnerships should then be avoided where there is a high risk
of business failure and/or large amounts of capital are required to get the business going.
Nevertheless, with unlimited liability, partners may have a greater commitment to the success of
the business.
Public limited companies by contrast are legally separate from their owners, and hence a
business’s debts belong to the business and not its owners. In a public limited company, owners
hold shares in the company and through share issues the business is able to raise finance to fund
its growth and investment. Such companies can, however, be subject to merger and takeover.
2. Explain why the business objectives of owners and managers are likely to diverge. How might
owners attempt to ensure that managers act in their interests and not in the managers’ own
interests?
The business objectives of owners and managers can often diverge because each group is likely to
be pursuing its own interests. Owners are assumed, in traditional theory, to be profit maximisers,
and would thus require their managers to pursue strategies which were consistent with this.
Managers, however, might wish to pursue other goals, such as the maximisation of growth. Profits
might consequently be sacrificed in the short term as managers attempt to acquire a greater share
of the market. In order to ensure that managers act in the owners’ best interests, owners will
attempt to ensure that managerial salaries are closely linked to the business’s profitability, and
that managerial decision making is closely monitored.
3. What is the Standard Industrial Classification (SIC)? In what ways might such a classification
system be useful? Can you think of any limitations or problems such a system might have over
time?
The Standard Industrial Classification (SIC) is the formal means of classification of firms into
industries. It is used by the government as a means of collating data on business and industry