Objectives of firms

Question 1

Reasons for profit maximisation?

Answer 1

• Re-investment
• Dividends for shareholders
• Lower costs = Lower prices for consumers
• Reward for entrpernership

Question 2

Where does profit maximisation occur and why does it occur at this place?

Answer 2

Profit maximisation occurs when MC = MR

Any quanitiy to the right cannot be maximising profit as cost is greater than revenue. Any point to the left will mean shows that revenue is much greater than cost. Each extra unit produced will generate more revenue than before. Aslong as marginal revenue is greater than marginal cost, each extra unit will generate profit. Therefore the only logical place to stop is when no more extra profit can be made i.e where MC = MR

Question 3

Why may some firms choose not to profit maximise?

Answer 3

• They don’t know their MC and MR
• avoid scrutiny i.e regulators may assume that the business is doing something dodgy e.g charging high prices / cutting corners. This may lead them to being put under investigation
• Key stakeholders could be harmed
• Other objectives may be more important

Question 4

When does profit satisficing occur?

Answer 4

When a business sacrifices profits to satisfy as many key stakeholders as possible.