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

In the standard economic theory of the firm, which objective is assumed to drive a firm's output and pricing decisions, and is the benchmark against which other objectives such as sales or growth are compared?

The standard assumption is that firms aim to maximise profit. Economic theory uses this as its benchmark objective for output and pricing decisions, while objectives like revenue, sales or growth maximisation are treated as alternative behavioural assumptions that depart from it.

  1. AMaximising total revenue regardless of cost
  2. BMaximising profitCorrect
  3. CMaximising market share at any price
  4. DMinimising average cost at all output levels
  5. Maximising the number of employees

Explanation

The neoclassical theory of the firm assumes profit maximisation as the central objective. Alternatives such as revenue, sales or growth maximisation are treated as departures from this benchmark. Revenue maximisation ignores costs, so it is not the standard assumption.

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