Author Question: Explain the reasons firms might follow the Baumol model of maximizing revenue subject to achieving a ... (Read 49 times)

bobbie · **on:** Jul 1, 2018

Explain the reasons firms might follow the Baumol model of maximizing revenue subject to achieving a minimum level of profits.

What will be an ideal response?

Question 2

Production of a good produces pollution that is very damaging with each additional unit. A monopoly facing a very elastic demand curve will most likely produce

A) less than the social optimum of the good.
B) more than the social optimum of the good.
C) the social optimum of the good.
D) no externality.

sierrahalpin · **Reply #1 on:** Jul 1, 2018

Answer to Question 1

Firms might wish to increase their market shares within the industry, managers' power and prestige tend to grow with an increase in the size of a business' level of operations, eschewing profit maximization might avoid new firms entering the industry and/or pressure for government regulation, and increases in the scale of a firm's level of operation might permit capturing cost economies of scale through greater market power to extract lower prices from the firm's suppliers of inputs.

Answer to Question 2

B