[...]... allows the stock holders, who are the owners of the company, to avoid liability for acts of the corporation Corporations are owned by stockholders who contribute capital They in turn elect directors to serve on the board The board of directors is responsible for setting major corporate policy and hiring the officers The officers are the cor porate agents responsible for the daily operation of the corporation... where the consumer’s entire income will be exhausted on these two goods, the budget constraint would be: Ã Ã I ¼ PX X þ PY Y where I is the consumer’s income, PX is the price of good X, X is the quantity of X consumed If the consumer spent all of her income on good X, then Y would be zero and the maximum amount of X which could be consumed is X ¼ (I=PX ) The budget constraint shows the combinations of the. .. some of the risk), but rather how that company’s returns relate to the rest of the portfolio The beta coef ficient measures the additional risk a given stock adds to a portfolio and for stock j it is defined as: Bj ¼ (cov(rj À rf , rm À rf ) )=var(rm À rf ) where cov() is the c o v a r i a n c e of the risk premium of stock j with the risk premium of the market portfolio, var() is the v a r i a n c e of. .. c e of the risk premium of the market, rf is the risk free rate of return, rj is the return to stock j, and rm is the return to the market portfolio The beta coefficient is simply the estimated coefficient from a l i n e a r r e g r e s s i o n of the risk pre mium for stock j against the risk premium for the market as a whole A company can determine its cost of equity capital by determining the risk... firms invest in a number of assets, the internal rate of return will be a weighted average of these internal rates of return, all of which are forward looking It is very unlikely that the ac counting rate of return will equal the appropriate economic rate of return, and in their simulations Fisher and McGowan showed that the relation ship between accounting profits and economic profits was very poor For... establish these effects of adverse selection in insurance markets The adverse se lection problem in insurance markets arises be cause those with the highest probability of experiencing a negative event are the ones who want to purchase insurance, but they are the least desirable customers from the perspective of the insurance company because of their high probability of becoming claimants The insur... context of the used car market on the other hand, sellers of the ‘‘good’’ cars may be willing to incur the cost of offering a warrantee with the sale of the car See also asymmetric information; imperfect in formation; principal–agent problem Bibliography Akerlof, G A (1970) The market for ‘‘lemons’’: Quality uncertainty and the market mechanism Quarterly Jour nal of Economics, 84, 488 500 Rothschild,... unfair practices of their larger rivals Still others, including Katzman (1984), argue that the original intent, in part, grew out of the concern that economic power, from both large absolute size and large relative size of firms, may translate into political power, to the detriment of democracy and the country’s social structure The interpretation of these statutes and the rigor with which they are enforced... be higher than if they purchased the smaller size The firm profits by raising the prices of the individual products and then choosing the ap propriate bundled price to win those consumers who desire both products but are unwilling to pay for both separately Consumers then self select by purchasing the individual products or the bundled product according to their total valuation of the good Bibliography... agreement, either oral or written, or it business entities may arise through the acts of the parties showing that they intend a partnership to exist A sharing of profits is the primary evidence that a partner ship is intended The partnership agreement normally governs the rights and duties of the partners In the absence of a contract, state law will control Virtually all states have adopted the Uniform . includes new references on the economics of the Internet, network externalities, and the Microsoft antitrust case (in both the US and the European Union). These entries help explain why the Internet. viii Dictionary Entries A–Z 1 Index 254 Preface The second edition of the Blackwell Encyclopedia of Management: Managerial Economics, like the first edition, provides a reliable, comprehensive, and valuable. respond to the number of messages they see. Therefore the appropriate measure of advertising intensity for managers should be total advertising expend itures deflated by an index of the cost per million viewers