3.2.1 Business Objectives

Question 1

What are the 3 main business objectives for Shareholders?

Answer 1

Profit Max
Sales Max
Rev Max

Question 2

Why do Firms Profit Maximise

Answer 2

Shareholder benefits
Wealth increase

Question 3

Profit Maximisation Rule

Answer 3

MC = MR: No additional profit in producing another unit.
MC < MR: Producing more yields additional profit.
MC > MR: Beyond profit maximisation, incurring marginal losses.

Question 4

Challenges firms face while trying to Profit Maximise

Answer 4

Firms may struggle to identify profit maximisation levels
Short-term price adjustments may be delayed
Frequent price changes disrupt customer relationships
PA problem

Question 5

Why do Firms Revenue Maximise

Answer 5

Firms cant Profit Max due to the Principal-Agent problem
Firms aim to increase output for economies of scale

Question 6

What incentives Managers to Revenue Maximise

Answer 6

Sales managers receive commissions on sales
Commission incentivizes them to maximize sales

Question 7

Why do Firm’s Revenue maximise in the short run?

Answer 7

To eliminate competition as theres lower prices compared to profit maximisation

Question 8

Revenue Maximisation Point

Answer 8

Produce until MR (Marginal Revenue) = 0.
When MR > 0, producing more increases total revenue.

Question 9

Why do Firms Sales maximise in the short run

Answer 9

Allows selling remaining stock without making a loss per unit

Question 10

Sales Maximisation Point

Answer 10

Achieved when AC (Average Cost) = AR (Average Revenue).
Occurs at normal profit/breakeven.

Question 11

Profit Satisficing

Answer 11

Opting for a satisfactory level of profit rather than profit maximisation due to the principal-agent problem

Question 12

Why do firms profit satisfice

Answer 12

Managers choose an output level between profit and sales maximisation
Enhances wages for managers and minimizes conflicts with shareholders.