Answer to Question #144083 in Economics of Enterprise for Nawaz

Question

The shareholder of Al-Karam wants to maximize his profits by selling his goods in the larger quantities. In order to achieve his target (s) he hired a manager to look after his business. However, the manager instead of maximizing business profits started maximizing his own interest by selling the designs in black to the competitor’s designers. Analyze the above situation and explain the possible problem that might occur for Al-Karam.

Answer 1

Manager selling goods in back market then it means, Al-Karam will have a loss in sales as all profits are earned by the manager.

To maximize profit of Al-Karam, the firm should produce quantity at which marginal revenue equals marginal cost. And for this case, profit is not maximized. Al-Karam’s profit will even decrease as the firm produces more than profit –maximizing quantity.