3.2.1 Business Objectives

Question 1

What is meant by profit maximising and the profit maximising condition?

Answer 1

Profit Maximisation refers to the output level at which profits are at their peak. It occurs when MC = MR

Question 2

Define revenue maximisation

Answer 2

Is the level of output at which revenue is at its maximum. It occurs when MR = 0

Question 3

When might a firm conduct revenue maximisation instead of profit maximisation?

Answer 3

When there is a divorce of ownership and control, or the principal agent problem. The agents may have an objective of increasing revenue in order to maximise their commissions for example.

Question 4

What is meant by sales maximisation?

Answer 4

Is the highest level of output a firm can produce without making a loss. It occurs where AR=AC (Normal profits)

Question 5

When might a firm conduct sales maximisation instead of profit maximisation?

Answer 5

This could be when a firm has the principal agent problem, and wants to expand market share, or maybe when they are just breaking into a market in order to establish market share.

Question 6

What is meant by satisficing?

Answer 6

When a firm makes just enough profit to keep shareholders satisfied, whilst pursuing other objectives such as sales or revenue maximising.

Question 7

When might a firm conduct satisficing instead of profit maximisation?

Answer 7

When there is a divorce of ownership from control or the principal agent problem