3.2 Business Objectives

Question 1

Output level for profit maximisation

Answer 1

Marginal cost (MC) = Marginal revenue (MR)

Question 2

Why does MC=MR profit maximise?

Answer 2

Fewer units produced will mean missing out on profitable units where MR>MC. Beyond this level unprofitable units will be produced because the additional costs (MC) > additional revenue (MR)

Question 3

Rationale for profit maximising

Answer 3

Owners of firms want to maximise their returns

Question 4

Profit maximisation diagram

Answer 4

Question 5

Output level for revenue macimisation

Answer 5

Marginal revenue (MR) = 0

Question 6

Why does MR=0 revenue maximise?

Answer 6

Fewer units produced will mean missing out on units that would have added to revenue ie units where MR are positive. Beyond the revenue maximising level, MR becomes negative ie total revenue falls. TR rises up to the point where MR=0 and falling beyond it

Question 7

Rationale for revenue maximising

Answer 7

If firms are subject to a minimum profit constraint as the remuneration of managers/directors might be linked to sales revenue rather than profits. Can only happen if there is a divorce of ownership from control

Question 8

Revenue maximisation diagram

Answer 8

Question 9

Output level for sales maximisation

Answer 9

When Average Cost (AC) = Average Revenue (AR)

Question 10

Why does AC=AR sales maximise?

Answer 10

Because it is the highest level of output before losses are made ie normal profits will return

Question 11

Rationale for sales maximising

Answer 11

Gain in market share. It is usually a short run phenomenon, using limit pricing to deter new entrants
Managers salary, power + prestige may rely on sales performance

Question 12

Sales maximisation diagram

Answer 12

Question 13

Output level for allocative efficiency

Answer 13

Price/average revenue = Marginal Cost
P = MC

Question 14

Why does P=MC maximise allocative efficiency?

Answer 14

Because the MC represents the opportunity cost of those resources to society and this is being equated to its value (price) to society. Fewer units produced have a value in excess of the cost to society; the signal is that more needs to be produced. A monopolist restricts output so that th price exceeds MC.

Question 15

Rationale for maximising allocative efficiency

Answer 15

It is unlikely that firms will do this unless they are owned by the government

Question 16

Maximum allocative efficiency diagram

Answer 16

Question 17

Satisficing

Answer 17

Looking after the firm’s stakeholders, such as customers, shareholders, suppliers, employees and trade unions, probably at the expense of short run profits.