A firm maximizes profit by operating where marginal revenue equals marginal cost. In the short run, a change in fixed costs has no effect on the profit maximizing output or price. Consequently, the profit maximizing output would remain the same.
Why do firms want to Maximise profit?
Classical economic theory suggests firms will seek to maximise profits. The benefits of maximising profit include: Profit can be used to pay higher wages to owners and workers. Profit enables the firm to build up savings, which could help the firm survive an economic downturn.
What happens when a firm tries to maximise profits?
As a firm is trying to maximise its profits, it needs to consider what happens when it changes its production by one unit. The firm will of course incur an extra cost from producing an extra unit, but will also receive revenue from that unit.
Why is profit satisficing a problem in many firms?
Profit Satisficing In many firms, there is a separation of ownership and control. This is a problem because although the owners may want to maximise profits, the managers have much less incentive to maximise profits because they do not get the same rewards, (share dividends)
Why is MC = MR at the profit maximizing level of output?
The firm should continue doing this until MC=MR, a point at which they should keep production constant, because producing an extra unit beyong this point creates a higher marginal cost for the firm that it creates marginal revenue. Need help with Maths? One to one online tuition can be a great way to brush up on your Maths knowledge.
Why do owners have less incentive to maximise profits?
This is a problem because although the owners may want to maximise profits, the managers have much less incentive to maximise profits because they do not get the same rewards, (share dividends)
