Question:
Suppose the utility function for a firm manager is U = π+ bQ, where Q is output, π is profit, and b is a positive constant. How would the firm's output compare with what it would be if the manager's objective was to maximize profit?
A. It would be greater than the profit-maximizing output.
B. It would be less than the profit-maximizing output.
C. It would be the same as the profit-maximizing output.
D. None of the statements associated with this question are correct
Answer:
The correct choice is A.
If the utility function for a firm manager is U = π + bQ, where Q is output, π is profit, and b is a positive constant. It would be greater than the profit-maximizing output.
Explanation:
Economic theory normally uses the profit maximization assumption in studying the firm just as it uses the utility maximization assumption for the individual consumer. This approach is taken to satisfy the need for a simple objective for the firm. This objective seems to be the most feasible.
The profit-maximizing firm chooses both inputs and outputs so as to maximize the difference between total revenue and total cost.
The firm will adjust variables under its control until it cannot increase profit further. Thus, the firm looks at each additional unit of input and output with respect to its effect on profit.
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