The Rational Producer

Question 1

What is the assumption of rational producer choice

Answer 1

• Profit Maximisation; rational firms seek to maximise their profits

Question 2

What are the 3 alternative business objective of the rational producer

Answer 2

• Cooporate social responsibility
• Satisficing
• Growth Maximisation

Question 3

Explain corporate social responsibility in terms of the rational producer

Answer 3

• Self-interest behaviour of firms = negative consequences for society
• well-being of firms is not consistent with the welfare of society (like a self-interested firm that pollutes the environment)
• Firms can engage in actions that most consumers would consider ethically unacceptable like in many developing countries=employing poorly paid children, forced to work long hours
• A negative image can cut deeply into a fims’ revenues by lowering worker productivity + sales
• Socially irresponsible behaviour can lead to gov regulation of the firm intended to minimise the negative consequences of the firms’ actions for society

Question 4

Explain satisfying in terms of the rational producer

Answer 4

• the large modern enterprise consists of lots of separate groups; within the firm, each has its own objectives that may overlap or conflict
• This multiplicity of objectives doesn’t allow firms to pursue any kind of maximising behaviour hence, firms try to establish processes through which they can make compromises
• This results in the pursuit of many objectives that are placed in a hierarchy. First try to achieve satisfactory rather than optimal results; this is called satisfying

Question 5

Explain growth maximisation in terms of the rational producer

Answer 5

• Firms may just be interested in maximising growth rather than profits as the larger they grow, the greater EOS they can benefit from and the lower their average costs of production
• This means firms can also diversity their production into diff products and markers hence, reducing its dependence on a single product/market
• With a larger share, it can yield greater market power and will have more control over the prices it charges.