What are the problems with the goal of profit maximization?

What are the problems with the goal of profit maximization?

While profit maximization in financial management has the potential to bring in extra money in the short-term, long-term earning could be drastically diminished. Lowering production quality for the sake of increased profits will hurt your brand, upset customers, and allow competitors to steal your business.

How do you calculate profit maximizing profit?

The profit-maximizing choice for the monopoly will be to produce at the quantity where marginal revenue is equal to marginal cost: that is, MR = MC. If the monopoly produces a lower quantity, then MR > MC at those levels of output, and the firm can make higher profits by expanding output.

When does the formula for profit maximization work?

So, if the price elasticity of demand is –2, the profit maximizing price is: 2 MC 1 2 MC 1 2 2 * MC = ⋅ − − = ⋅      − − p = So, the profit maximizing price will be two times the marginal cost. This formula only works if demand is elastic. To see why, imagine that demand is inelastic.

Which is the best example of maximum profit?

Many times business will raise the prices of their goods or services to increase their profit. However, when they raise their prices, they usually lose some customers. In such situations, the price at which the “maximum” profit occurs needs to be found. 2. Example:An auditorium has seats for 1200 people.

Why is profit maximization important in financial management?

Profit maximization might be one of the top goals of financial management but this type of practice doesn’t imply that short-term profit increases will help produce long-term sustainable goals for the company.

When to raise prices to make maximum profit?

Many times business will raise the prices of their goods or services to increase their profit. However, when they raise their prices, they usually lose some customers. In such situations, the price at which the “maximum” profit occurs needs to be found.