37- Different objectives and policies of a firm

Question 1

List 5 different objectives of a firm

Answer 1

• Profit Maximisation
• Revenue Maximisation
• Sales MAximisation
• Profit Satisfycing
• Survival

Question 2

Profit Maximising

Answer 2

Aim to maximise their profit by producing at MC=MR

Question 3

5

Reasons why firm may choose to not operate at the profit maximising level?

Answer 3

• DIfficult to identify the output where MC=MR in real life
• Firms with large market share want to avoid the attention of regulatory bodies.
• Supernormal profit attracts entrants when barrier to entry are low
• Damage realtionship between consumers, workers and the managers. (High pricesa nd comparatively low salaries)
• Not appeal to management as high profit might trigger actions by rival firms (Principle Agent Problem)

Question 4

when does a firm’s main objective is survival?

Answer 4

• Loss of best consumers or a downturn in economy (COVID-19 and recessions)

Question 5

A firm will not operate in the long run if

Answer 5

They cannot cover their average total costs.

Question 6

A firm wil shut down in the Short Run when

Answer 6

Average variable cost is greater than revenue

Question 7

Profit Satisficing

Answer 7

Earning the minimum/reasonable amount of profit to satisfy both the shareholders and stakeholder.
Shareholder - owners
Stakeholders - Customers (low prices), Workers (Salary + Better working conditions)

Question 8

Sales Maximisation

Answer 8

-Maximise the volume of sales by prducing at AR=AC (total revenue = total cost)

Question 9

Reasons why firms operate on sales maximisation

Answer 9

• Predatory pricing to eliminate new entrants
• Gain a large market share and enjoy the benefits of economies of scale
• Have social obejctives
• When AC is graeter than AR – Cross subsidisation

Question 10

cross subsidisation

Answer 10

Profits from one part of a firma re used to offset losses made elsewhere in the business.

Question 11

Revenue Maximisation

Answer 11

• Maximise total revenue by operating at MR=0
• Managerial salaries and bonuses are often based on revenue rather than profits. – example of principle agent problem

Question 12

Price Discrimination

Answer 12

selling the sae priduct to different buyers at different prices to maxiise profit and revenue. Converting consumer surplus to producer surplus

Question 13

The 1st degree of price discrimination

Answer 13

• charging each consumer the highest amoun they are willing to pay.
• Difficult in reality and only possible in the service sector (2nd hand car dealer, doctors)
• D=MR=AR

Question 14

The 2nd degree if price discrimination

Answer 14

-High price for the first unit and price decarses as more units are purchased.
(food items, tickets to shows)

Question 15

The 3rd degree of price discrimination

Answer 15

Actively discriminate between consumers on preasumtions that that diff group have diff elasticities of demand.
Air fares - early = cheap, later = expensive
Student discounts - cinemas, subscriptions

Question 16

Conditions for price discrimination

Answer 16

• Large geographic distance
• different elasticities of demand
• Firms have to be price makers - ability to set prices

Question 17

Consequences of price discrimination

Answer 17

• Mechanism to keep the market sseparate is difficult: consumers buying at cheap prices and then reselling
• Consumer surplus is converted to producer surplus (government need to intervene)
  + Improves allocative efficiency
  + Allows firms to stay in the LR
  + Profits can be used to achieve dynamic efficiency

Question 18

List 3 types of pricing policy

Answer 18

• predatory
• limiting
• leadership