3.2 Business Objectives

Question 1

What is profit maximization? Where does this occur?

Answer 1

• When a firm operates to maximize profits
• Occurs at MR = MC
  (Supernormal profit when MR > MC)
• Involves selling a lower quantity at a higher price

Question 2

What is revenue maximization? Where does it occur?

Answer 2

• When a firm operates to maximize revenue
• Occurs at MR = 0

Question 3

What is sales maximisation? Where does it occur?

Answer 3

• When a firm operates to maximise revenue
• Occurs at AC = AR (to make normal profit)

Question 4

Why may a firm Profit maximise?

Answer 4

• To generate funds to investments, security and larger market share

Question 5

Why may a firm Revenue maximise?

Answer 5

• Managers may do so in order to earn rewards and bonuses

Question 6

Why may a firm Sales Maximise?

Answer 6

• To increase market share (can influence prices long run)
• Higher prestige for managers (meaning higher salaries)
• Easier to judge level of growth than level of profit

Question 7

What is the problem with Sales and Revenue maximisation (over profit maximisation)?

Answer 7

• Involves price drops, which other business may follow (therefore little impact of these techniques)

Question 8

What is Profit Satisficing?

Answer 8

• When Managers make enough profit to keep owners happy, but also maximizing their own benefits (i.e., making work enjoyable)