An increase in income will lead firms to shut down if the good is an inferior good assuming an initial long run competitive equilibrium with no sunk costs of production. T/F. Explain.

 

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Profit maximization takes place by maximizing sales and minimizing costs. If sales remain the same, minimizing costs leads to more profit; if costs remain the same, maximizing sales leads to more profit, i.e. companies can maximize profit on the one hand via the goods supply (sales market) and on the other hand via the factor demand volume (procurement market). So minimizing costs and maximizing sales are sub-goals of profit maximization.

A company is faced with the decision problem of finding the sales volume that maximizes profit. If a company wants to maximize profit, it can achieve this on the sales market by increasing quantities (sub-goal: maximizing sales). In perfect markets for both the monopolist and the polyp list, an increase in quantity is initially only possible by lowering prices. This, on the other hand, has an ambivalent effect on the revenue: the increase in the volume components increases the revenue (revenue = volume x price) - the price component has a positive effect on the volume component. But the marginal revenue (syn. Marginal sales) - that is, the increase in revenue that results from the sale of additional units of measure - decreases due to the reduction in the price component.

More recent theories, however, question profit maximization as an objective function of the company. The separation of ownership and management in large companies, in particular, leads to a change in incentive structures and interests in terms of target values ??in terms of institutional economics: This also becomes clear in the discussions on shareholder value and value-based management: the maximization goals here are to increase the company value or the value of equity. From this perspective, profit maximization itself is only a partial goal, insofar as the company itself is only an instrument for realizing the owner's goals.