3.2 business objectives

Question 1

what is meant by profit maximisation and the profit maximising condition

Answer 1

it is the output level at which total revenue is as far above the total cost curve as possible. the condition is MC = MR - where the firm receives the same revenue from selling each unit of output.

Question 2

define revenue maximisation

Answer 2

it is the level of output at which marginal revenue = 0. MR = 0

Question 3

when might a firm conduct revenue maximisation instead of profit maximisation

Answer 3

when a firm has more goods they need to sell. a revenue maximising firm will produce more output than a profit maximising one, and will need to charge a lower price to sell the extra output. this could be for goods that have expiry dates etc.

Question 4

what is meant by sales maximisation

Answer 4

where total revenue only just covers total cost and where average cost = average revenue.

Question 5

when might a firm conduct sales maximisation instead of profit maximisation

Answer 5

when a firm has the principal agent problem and wants to expand market share

Question 6

what is meant by satisficing

Answer 6

where managers of firms aim to produce satisfactory results for the firm e.g. in terms of profits, rather than trying to maximise them. this could be if their salaries are based off how much profit is made

Question 7

when might a firm conduct satisficing rather than profit maximising

Answer 7

managers don’t feel the need to profit maximise as they have other objectives

Question 8

draw a diagram to show revenue maximisation, sales maximisation and profit maximisation

Answer 8

sales maximisation - TC curve and negative parabola TR curve, equilibrium where they meet

revenue maximisation - TC and negative parabola TR curve, total revenue is maximised at the peak of the TR curve at Qr.

profit maximisation - straight TR curve and regular TC curve, profit max where biggest gap is.

or MC and MR curve