Explain how stock options can ensure compatibility between the interest of stockholders and managers
When the price of the company's stock goes down, stock options are not used. Thus, the owner of the option loses only what was paid for the option, if anything. But if the price of the stock rises, the owner can make a profit by "exercising the option." If stock options are granted to a corporation's management under appropriate rules, they may well be a powerful way to deal with the principal-agent problem in corporations. If managers who own stock options work harder to make the company successful, their actions can raise the market price of the corporation's stock, thereby benefiting the stockholders as well as themselves.
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In a natural monopoly, throughout the range of market demand
A) marginal cost is above average total cost and pulls average total cost upward. B) marginal cost is below average total cost and pulls average total cost downward. C) there are diseconomies of scale. D) average total cost is above marginal cost and pulls marginal cost upward.
La Tortilla is the only producer of tortillas in Santa Teresa. The firm produces 10,000 tortillas each day and has the capacity to increase production to 100,000 tortillas each day
La Tortilla has made a large profit for years, but no other firm has chosen to compete in the Santa Teresa tortilla market. La Tortilla has been able to deter entry because if other firms were to enter the market it would greatly step-up production and reduce price. A) La Tortilla's behavior is inconsistent with economic theory. B) La Tortilla has been successful because of its credible threat. C) La Tortilla behaves like a Stackelberg firm. D) La Tortilla must have other barriers to entry to protect its monopoly power.