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The profit maximization issue can also be approached from the input side. That is, what is the profit maximizing usage of the variable input? [13] To maximize profit the firm should increase usage of the input "up to the point where the input's marginal revenue product equals its marginal costs". [14]
The virtual assembly of the firm, with the decision-making process as the unit, for the purpose of predicting their behaviour is highly questioned by critics. There has also been staunch support for profit maximization rather than satisficing behaviour, which is one of the core elements of the model. [13]
Managerial theories of the firm, as developed by William Baumol (1959 and 1962), Robin Marris (1964) and Oliver E. Williamson (1966), suggest that managers would seek to maximise their own utility and consider the implications of this for firm behavior in contrast to the profit-maximising case. (Baumol suggested that managers’ interests are ...
The firms are economically rational and act strategically, usually seeking to maximize profit given their competitors' decisions. An essential assumption of this model is the "not conjecture" that each firm aims to maximize profits, based on the expectation that its own output decision will not have an effect on the decisions of its rivals.
Mathematically, the markup rule can be derived for a firm with price-setting power by maximizing the following expression for profit: = () where Q = quantity sold, P(Q) = inverse demand function, and thereby the price at which Q can be sold given the existing demand C(Q) = total cost of producing Q.
Individuals maximize utility and firms maximize profits. People act independently on the basis of full and relevant information . From these three assumptions, neoclassical economists have built a structure to understand the allocation of scarce resources among alternative ends—in fact, understanding such allocation is often considered the ...
Evolution and competition for scarce resources ensure that, in practice, firms do not have to consciously maximize an objective function. Alchian concludes that, despite uncertainty and the lack of knowledge by market participants, economists can still analyze the behavior of firms using the assumptions of profit maximization.
C. Robert Taylor points out that the accuracy of Hotelling's lemma is dependent on the firm maximizing profits, meaning that it is producing profit maximizing output and cost minimizing input . If a firm is not producing at these optima, then Hotelling's lemma would not hold. [2]