3.2.1 Business objectives Quiz: Pearson Edexcel Economics A, Unit 3

The 20 questions

1. Profit maximisation occurs where:

   • Output is as high as possible regardless of price
   • Marginal cost equals marginal revenue
   • Price equals average variable cost in the short run
   • Average cost is at its minimum for the firm

2. Revenue maximisation is the aim of maximising:

   • Profit at the level where marginal cost equals marginal revenue
   • Average cost, so that each unit is as cheap as possible to make
   • Total revenue, which is typically where marginal revenue is zero
   • Market share at a permanent loss, regardless of the revenue earned

3. A sales-maximising firm is most likely to:

   • Sell fewer units than a profit maximiser, at a higher price
   • Produce no output at all in order to keep its costs low
   • Produce exactly the same output as a profit maximiser
   • Sell more units than a profit maximiser, at a lower price, while keeping profit above a minimum level

4. Which is a reason why growth may be a business objective?

   • Growth always reduces business risk to zero in every market
   • Growth means producing lower output than before
   • Larger size can bring economies of scale, market power and managerial prestige
   • Growth is only a target for public sector organisations to pursue

5. Satisficing refers to:

   • Pricing below cost to force rivals out of the market
   • Achieving a satisfactory level of several objectives rather than maximising a single one
   • Maximising profit at any cost to the firm's reputation
   • Minimising costs regardless of the quality of the product

6. A firm produces the output where total revenue is maximised. Which objective is it pursuing?

   • Maximising market share at any price
   • Revenue maximisation
   • Profit maximisation
   • Survival

7. A firm's marginal cost and marginal revenue are both 50 at output 1,000. Is profit maximised?

   • Yes, profit is maximised at this output, since MR equals MC
   • No, because profit maximisation requires MR to exceed MC
   • Only if average revenue is zero at this output level
   • No, because marginal cost must be greater than marginal revenue

8. A sales-maximising firm compared with a profit-maximising firm will typically produce:

   • The same output at the same price
   • A lower output at a higher price
   • Zero output in order to avoid losses
   • A higher output at a lower price

9. A firm wants to keep its brand image even if this costs some profit. Which objective is most consistent?

   • Limit pricing designed to deter new entrants
   • Pure profit maximisation without any other aim
   • Ethical or social objectives
   • Revenue maximisation with zero marginal revenue

10. A manager paid by sales volume is most likely to pursue which objective?

    • Keeping the share price fixed at its current level
    • Profit maximisation with equal weight on costs
    • Minimising the firm's average variable costs only
    • Sales maximisation

11. Why might owner-managed firms pursue survival in a recession?

    • To maximise revenue at the point where profit is zero
    • To push output to full capacity whatever the cost
    • To leave the market entirely to avoid all competition
    • To avoid bankruptcy and keep the business going when revenue is falling

12. A firm is most likely to pursue growth when:

    • Demand is falling and it has no access to finance at all
    • It has access to finance and expects demand to rise
    • It faces a binding legal limit on its size in the market
    • Its owners want no change to the way the business is run

13. Which objective would a not-for-profit organisation typically emphasise?

    • Meeting its mission or service aims, with surpluses reinvested
    • Maximising the value of its shares on a stock exchange
    • Achieving monopoly control over its service area
    • Distributing the maximum possible dividends to its members

14. A profit-maximising firm's total fixed cost rises by a fixed amount. What happens to its output and profit?

    • Profit rises by the same fixed amount as the cost increase
    • Output is unchanged, but profit falls by that fixed amount
    • Output falls to zero because fixed costs are now too high
    • Output rises to cover the higher fixed cost

15. Evaluate the view that profit maximisation is the only realistic objective of firms.

    • Irrelevant, because objectives do not affect business decisions
    • Oversimplified: managers may pursue growth, satisficing or ethical aims, especially where ownership is separated from control
    • Accurate, because firms cannot choose their objectives at all
    • Accurate, because profit is always the only goal of any firm

16. A firm moves from profit maximisation to revenue maximisation. What is the likely consequence?

    • Profit rises because total revenue is higher at every output
    • Price may fall and output may rise, with lower profit but possibly a higher market share
    • Price and output both fall to zero in the market
    • Neither price nor output changes in any way at all

17. Why do alternative business objectives matter to a regulator?

    • They are illegal in all cases under UK competition law
    • They always make output efficient, so no regulation is needed
    • They can mean prices and output differ from profit-maximising levels, affecting consumer welfare
    • They never affect output, so regulators can ignore them

18. A firm faces demand P = 100 - 2Q and total cost TC = 20 + 10Q. What output maximises total revenue?

    • Q = 10
    • Q = 22.5
    • Q = 25
    • Q = 50

19. Using the same firm (P = 100 - 2Q, MC = 10), what is the profit-maximising price?

    • £50
    • £45
    • £55
    • £60

20. Evaluate a sales-maximisation objective.

    • It leads to zero output, since firms cannot sell at a loss at all
    • It always maximises long-run profit for the firm in every market
    • It is impossible to pursue in any market under current conditions
    • It may raise output and market share, but thin margins and costs above revenue can make it unsustainable

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