Alternative Objectives of Firms

Question 1

What is the core thesis of Baumol’s Model?

Answer 1

Firms may maximise sales revenue rather than profit, subject to a minimum profit constraint sufficient to satisfy shareholders or owners.

Question 2

In Baumol’s Model, where is Total Revenue (TR) maximised?

Answer 2

At the point where MR = 0, not where MC = MR.

Question 3

How does sales revenue maximisation affect output and price compared to profit maximisation?

Answer 3

It leads to a higher output and lower price than profit maximisation.

Question 4

What are managerial incentives in the context of Baumol’s Model?

Answer 4

Bonuses tied to turnover rather than profit.

Question 5

What is meant by ‘empire building’ in Baumol’s Model?

Answer 5

Managers may derive utility from controlling larger firms, gaining status and prestige.

Question 6

What issue arises from information asymmetry in Baumol’s Model?

Answer 6

Owners cannot easily verify profit-maximising behaviour.

Question 7

Under what market structures is Baumol’s Model most feasible?

Answer 7

Under monopoly or oligopoly.

Question 8

What allows for divergence from marginal cost discipline in Baumol’s Model?

Answer 8

Pricing power in monopoly or oligopoly.

Question 9

Fill in the blank: In Baumol’s Model, profit is defined as _______.

Answer 9

TR - TC

Question 10

True or False: Baumol’s Model suggests that firms always aim for profit maximisation.

Answer 10

False