Yr 2 Objective of firms

Question 1

How do you know when profit maximization is occurring?

Answer 1

MC=MR

Question 2

Why is profit maximisation an objective?

Answer 2

Reinvest profit into better capital

Dividends for shareholders, without them there wouldn’t be a company, so dividends given to them

Lower costs, profit is TR - TC so low costs given to consumers so lower prices, but high revenue

Question 3

Show MC and MR(imperfect comp) on a diagram

Answer 3

you can draw that but where MC>MR, they should stop output, they are losing out,
when MC is less than MR, they should carry on, more revenue than costs

Question 4

Why might businesses not want to profit maximise?

Answer 4

They don’t have the info to see where MC=MR
Avoid scrutiny
Key stakeholders could be harmed
Other objectives could be better

Question 5

But yo, what’s scrutiny

Answer 5

If firms make large profits, regulators may think they are doing something dodgy(like shortcuts to avoid costs) and the outcomes of these are always bad since investigators are against the business
therefore they have to increase prices :)

Question 6

Definition of profit satisficing

Answer 6

Sacrificing profit to satisfy as many key stakeholders as possible

Question 7

What’s a key stakeholder?

Answer 7

Practically the owners of the company can affect the business’s performance

Question 8

Will key stakeholders lose out on profit maximisation?

Answer 8

SHAREHOLDERS- unlikely, receive high dividends
MANAGERS- unlikely, they receive bonuses + higher incomes
CONSUMERS- maybe, if excess prices are charged
WORKERS- yes, mainly trade union, not profit max so higher costs, so fewer wages
GOVERNMENT- yes, wages cut, high prices for consumers, less economic growth
ENVIRONMENTAL GROUP- yes, pollution, resource degradation due to lower costs

Question 9

Definition of profit satisficing?

Answer 9

Sacrificing profit to satisfy as many key stakeholders as possible

Question 10

Will key stakeholders lose out if the firm doesn’t profit maximse?

Answer 10

SHAREHOLDERS- unlikely, receive dividends
MANAGERS - unlikely, receive bonuses + higher incomes
CONSUMERS - maybe, if the excess prices are charged
WORKERS - yes, mainly trade union, costs are higher now, lower wages
GOVERNMENT - yes, wages lower, lower consumption, low eco growth
ENVIRONMENTAL GROUP - yes, because of low costs, there’s pollution and resource degradation

Question 11

Problem for businesses if they harm their key stakeholders?

Answer 11

Consumers- now the firm has a bad reputation
workers - they will strike
government - investigate the firm, outcome will be against the business
environmental group - protests, affects reputation

Question 12

What occurs when a firm attempts Revenue maximization?

Answer 12

Marginal revenue = 0, so revenue is at max

Question 12

Why would companies want to focus on revenue maximisation?

Answer 12

Economies of scale - greater growth, lower AC, lower prices for consumers
predatory prices - lower prices, firms will undercut rivals, on purpose, sacrificing profit to drive out competition
principle agent problem - divorce between ownership(shareholders) and control(managers)
those who control will revenue max because they get better perks in the job

Question 13

Draw the diagram for revenue maximisation

Answer 13

clueee, just ac mc and ar(imperfect comp)

Question 14

Define sales maximisation

Answer 14

aka growth maximisation, businesses want to be as large as they can without a loss
AC = AR

Question 15

Draw the diagram with what you know

Answer 15

same as revenue max but add the MR curve, to show profit max (mc=mr) and ac = ar

Question 16

Why would a business go for sale maximisation?

Answer 16

Economies of scale = they are getting bigger, LRAC falls as output increase
limit pricing = limits competition, prices break even at a normal profit(AC=AR) so no incentive for firms to join market
principle agent problem = at higher output managers use growth as leverage for better perks
Flood the market = loads of output floods market, consumers see the product, then they are loyal to it

Question 17

In the LR what would a sales max business do?

Answer 17

They would be bigger so they would move away from sales max to profit max :)