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IAI Actuarial Core Principles · Business Economics · Relationship between economics and business

A listed Indian insurer's board is considering a new product. Under the traditional economic assumption about the objective of a firm, which goal would the board be assumed to pursue?

The traditional economic assumption is that a firm aims to maximise profit, meaning the difference between total revenue and total cost. Goals like market share, employee numbers or managerial perquisites belong to alternative theories of the firm, not the standard neoclassical model.

  1. AMaximising profitCorrect
  2. BMaximising market share regardless of cost
  3. CMaximising the number of employees
  4. DMinimising all risk to the firm
  5. Maximising managers' salaries and perquisites

Explanation

The standard neoclassical assumption is that a firm acts to maximise profit, the gap between total revenue and total cost. Other goals such as market share or growth are alternatives proposed in managerial and behavioural theories, not the traditional assumption.

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