business objectives

Question 1

why may firms aim to profit maximise

Answer 1

MC = MR (as long as MR is greater than MC the next unit will always generate more profit)

• reinvestment (making large profits, reinvest in form of capital, innovation, R+D)
• pay greater dividends for shareholders (owners of company)
• allow for lower costs (TR-TC) - in order to keep profits high - pass on lower costs to consumers via lower prices
• reward entrepreneurship such as when a business starts there are risks to that activity

Question 2

why may firms decide not to profit maximise

Answer 2

• they don’t know their MC and MR
• avoid scrutiny (comp authorities/ regulators may speculate they are up to something dodgy - charging higher prices, low standards =investigate - put in regulations/ reduce revs)
• key stakeholders (workers, consumers, government) could be harmed is profit max may be too hard

Question 3

what is profit satisficing

Answer 3

when business sacrifices profit to satisfy as many key stakeholders as possible

Question 4

why may firms choose to revenue maximise

Answer 4

MR = 0
- EOS benefit - rev max quantity is greater profit max quantity (greater growth, EOS, lower AC and lower prices for consumers)
- predatory pricing (rev max price lower than profit max price)
- principle agent problem (divorce between ownership and control)

Question 5

why may firms decide to sales maximise

Answer 5

business wants to become as large as possible w/o losses
- at breakeven AC = AR

• EOS
• price represents the limit price (takes away incentive for other firms to enter market- limit pricing)
• principle agent problem (managers may use growth/ sales as leverage to go for greater perks)
• flood the market - lots of consumers become more aware + develop loyalty, down the line you can change objective to profit max