Objectives of the Firm

Question 1

Revenue maximisation

Answer 1

• MR = 0
• Firm will increase output as long as it increases revenue

Question 2

Efficiencies in revenue maximisation

Answer 2

• Dynamic: Few profits are achieved
• Productive: Output is likely beyond the minimum AC
• Allocative: MR = 0, not MC
• X-inefficiencies: More likely as output is beyond optimum

Question 3

Profit maximisation

Answer 3

• MC = MR
• Assumed by the traditional theory of the firm

Question 4

Efficiencies in profit maximisation

Answer 4

• Dynamic: Strong incentive as large amounts of SNP
• Productive: Most likely to be achieved
• Allocative: P > MC
• X-inefficiencies: Cost discipline is present to maximise profit

Question 5

Sales maximisation

Answer 5

• AC = AR
• Highest level of output that can be sustained in the long run
• Further sales would cause a loss