3.2 Objectives of Firms

Question 1

Profit Maximising

Answer 1

MC=MR, cost of producing one additional unit = revenue it accumualtes

Question 2

Revenue Maximising

Answer 2

MR = 0

Question 3

Sales Maximising formula

Answer 3

AC=AR or TC=TR
Breaking even

Question 4

Reasons for/against profit maximisation

Answer 4

firms can be profit seeking but not profit maximising
imperfect knowledge means they cannot exactly pinpoint their PM point
Different products globally
+ principle agent problem
- not for profit firms won’t be
- may not be PM when they start up

Question 5

Reasons for revenue and sales maximisation

Answer 5

They want to achieve a rapid growth of market share.
They need to break even to justify staying in the market in the long run.​
Limit pricing as a deterrent to new competitors - increases brand dominance.​
Benefit from economies of scale as output rises.​
May be a short term strategy in order to profit maximise in the future.​
Internally, annual salaries and bonuses may be linked to sales or sales revenue targets rather than profits, influencing the behaviour of employees.​

Question 6

Reasons for saticficing

Answer 6

Satisficing involves the owners setting minimum acceptable levels of achievement in terms of revenue and profit.
A conflict of interest may arise between shareholders and directors regarding objectives.
Goal is to make enough profits to satisfy shareholders

Question 7

Sales Maximising graph linked to elasticities