3.2 Business objectives

Question 1

What is the condition for profit maximisation

Answer 1

MC=MR

Question 2

What is the condition for revenue maximisation

Answer 2

MR=0

Question 3

What is the condition for sales maximisation

Answer 3

AR=AC

Question 4

What is the effect on TR if price increased or decreased if a firms objective was revenue maximisation

Answer 4

• If P’s were cut= TR would fall
• If P’s were raised= TR would fall

Question 5

Why might a firms aim to maximise sales revenue rather than profits

Answer 5

Businesses wish to deter the profitable entry of new firms/ rivals into an industry

Question 6

Consequences if firms decide to aim to maximise sales revenue rather than profit

Answer 6

Reduction in the price of the firm’s shares since profit is likely to be lower

Question 7

Which business objective would consumers want

Answer 7

Consumers want firms to be sales maximisers as quantity is the highest

Question 8

William Baumal

What is the principle agent problem

Answer 8

Conflict of interest between principle (shareholders) between agent (managers/ CEOs) creates problems for firms.

Question 9

Principle- Agent problem example

Answer 9

It can occur when the managers act in their interests by seeking opportunities that enable them to receive more incentives and compensations/ CEO’s reinvests profits back to the company to enusre its growth, while the shareholders expect to receive dividends.

Shareholders= Profit maximisers
Managers/ CEO’s= revenue/ sales maximisers