Question

Economists normally assume that the goal of a firm is to earn

(i) profits as large as possible, even if it means reducing output.
(ii) profits as large as possible, even if it means incurring a higher total cost.
(iii) revenues as large as possible, even if it reduces profits.

a. (i) only
b. (Iii) only
c. (i) and (ii) only
d. (i) and (iii) only
e. (i), (ii) and (iii)

Answer 1

b. (Iii) only

Step-by-step explanation:

Profit maximization occurs at the point where there is the greatest positive difference between the total revenue to the firm, which is gained from selling goods and services, and the total cost of employing resources to produce there goods and services.

Goals of A Firm

Rather than maximizing profits, firms may attempt to maximize sales or total revenue in order to try and increase its market share relative to its competitors.

Goals of firms are:

Profit - Profit equals the total revenue - total costs.

Total costs - Fixed Costs + Variable costs.

Total revenue - Price x Quantity sold.

Therefore if:

-Total revenue is greater than total costs the business is gaining a profit.

-Total costs is greater than total revenue than the business is running at a loss.

Answer 2

B. (iii) only

Step-by-step explanation:

Economists normally assume that the goal of a firm is to earn

(iii) revenues as large as possible, even if it reduces profits.

The reason for economist to normally assume the goal of a firm is to earn revenues as large as possible, even if it reduces profits, is that, while achieving more profit is what can make firm to keep running, there are times when rather than maximizing the profits alone, the economist look at the long run and seeks to generate more sales or total revenue, even if it decreases the profit generated, so as to increase the firm market share relative to its competitors.

Hence, economist seeks to maximize profits, while making higher number of sales.

In short, the seek the following:

1. Growth Maximization

2. Increasing Market Share

3. Satisfying Behavior

4. Maximizing Sales or Total Revenue