Th3.2: Profit Maximisation

Question 1

What do neoclassical economists assume?

Answer 1

that the interests of owners or shareholders are the most important and there the goal of the firm is to profit maximise in the short run, in order to maximise owner’s returns

Question 2

What can firms do by short-run profit maximising?

Answer 2

firms can also generate funds for investment and to help them survive a slowdown during a recession

Question 3

Where do firms produce in order to short run maximise?

Answer 3

MC = MR

Question 4

What happens if firms produce less than this?

Answer 4

then producing more will increase profit since MR would be higher than MC so they’re making more in revenue than it costs to produce the good and so would be making a profit

Question 5

What happens if firms produce more than this?

Answer 5

they would be making a loss on the goods produced above the profit maximising point and so they should decrease production

Question 6

Refer to PP

Look at Graph 24. What is the output determined by?

Answer 6

where MC = MR

Question 7

Refer to PP

Look at Graph 24. What is the price at this output determined by?

Answer 7

the AR curve

Question 8

Refer to PP

Look at Graph 24. Where does the diagram show firms will produce at?

Answer 8

P1Q1