Question

Economists assume that households try to maximize utility and firms try to: a. maximize sales. b. maximize the scale of operation. c. maximize capital usage. d. maximize profits.

Answer 1

Answer:

D

Explanation:

The traditional objective of a firm is profit maximization. There exists alternative short run objectives such as sales maximization, sales revenue maximization, survival, satisficing profits, and ethical objectives.  Sometimes, there exists is a trade-off between these objectives as some of these objectives may lower profits in the short-term, but lead to profit maximization in the long-run; there is also likely to be the principal-agent problem if a firm pursues other obejctives aside from maximizing profit. Profit maximization is viewed as the utimate objective of the firm and can be derived using the Total Revenue (TR) and Total Cost (TC) approach or the Marginal Revenue (MR) and Marginal Cost (MC) rule.  Profit is maximized where theTR curve is at maximum (its highest point) at which MR is zero. Alternatively, using the MR/MC rule, profit is maximized where MR=MC.