LS6 : Business Objectives

Question 1

what is the assumed business objective for most firms?

Answer 1

profit maximisation

Question 2

what are the five business objectives?

Answer 2

1. revenue maximisation
2. sales maximisation
3. managerial utility maximisation
4. satisficing
5. corporate social responsibility

Question 3

what is revenue maximisation?

Answer 3

occurs at the level of output when marginal revenue = 0.

stopping short of this quantity means that an opportunity for more revenue has been lost, whereas increasing sales beyond this quantity means that MR becomes negative and TR falls.

RM firms will produce more output than a PM one so will need to charge a lower price in order to sell the extra output.

baumol pointed out that shareholders would not agree to this objective

Question 4

where is the profit-maximising level of output?

Answer 4

MC = MR

producing up to the point where the marginal revenue from selling one extra unit exactly equals the marginal cost of producing that unit.

profit maximised at Q

super-normal profits being PABC.

Question 5

where is the revenue-maximising level of output?

Answer 5

q-r

Question 6

what is sales maximisation?

Answer 6

the firm pushes for higher sales up to the point q-s where it breaks even. total revenue only just covers total cost and AR = ATC. if the firm moved beyond this point, they will have to shut down.

Question 7

where is the sales-maximising level?

Answer 7

selling at a quantity where AR = ATC (at point b)

if the firm goes beyond this quantity, the firm risks not being able to cover total costs, leaving them producing on a loss

Question 8

what is managerial utility maximisation?

Answer 8

when firm management is separate from ownership, managers develop their own objectives that revolve around the maximisation of their own utility.

utility could be derived from increased salaries, larger fringe benefits, employment of more staff (more authority) or investment into favoured projects.

this could cut into profits and make them lower than they should be.

Question 9

what is satisficing?

Answer 9

each separate group within a firm has its own objectives which may overlap or conflict. this multiplicity of objectives means firms cannot pursue any kind of maximising behaviour. this leads to firms compromising each objective so that the firms can each satisfactory rather than optimal or best results.

Question 10

what is corporate social responsibility?

Answer 10

firms may promote an image of being ethically and morally correct by engaging in socially beneficial activities such as :

• avoidance of polluting activities
• engaging in environmentally sound practices
• support for human rights (no child labour or slavery)
• arts and athletics sponsorships
• donations to charities