Micro A2.2 Business Objectives

Question 1

According to Neo-Classical Economists why do firms profit maximise in the short run?

Answer 1

They assume the interests of the shareholders and owners are the most important, so they profit maximise to maximise the owner’s returns

(firms will also profit maximise to earn money for reinvestment and to help survive during a recession)

Question 2

Why is profit max where MR=MC?

Answer 2

Below this point there is more money for the firm to make because MR is above MC. Above this point MC is more than MR so the firm is losing money ad therefore where MR=MC is where profit is maximised

Question 3

Why would some firms want to Revenue Maximise?

Answer 3

1. Managers will feel that if they earn more revenue for the company it acts as a justification for a wage increase, especially if their wage is tied to revenue
2. Fall in revenue could lead to fall in staff and will worry financial institutions and make them less willing to lend money

Question 4

Why would some firms want to Sales Maximise?

Answer 4

1. Managers salaries may be linked to the size of the company so they wish to grow to earn a bigger wage
2. Easier for people to judge growth than profit so increases prestige of the company
3. larger firms should be able to survive rougher periods
4. Help increase market share where they can push other firms out of the market and have more power over prices

Question 5

What is the Objective of Profit Satisficing?

Answer 5

Where manager will make enough profit to keep owners happy while following other objectives. these objectives are usually for their own benefit (eg. increasing their salary which may increase the firms costs)

Question 6

What is Marginal Cost Pricing?

Answer 6

Some firms and particularly Nationalised companies aim to maximise social welfare. this will occur by producing at an allocatively efficient point MC=AR