Microeconomic theory assumes that all firms maximize profits because
A)it has been observed that managers always align their goals with investors and seek to maximize short and long run profits
B)profit is likely to dominate almost all decisions for smaller firms
C)if managers deviate from profit maximization decisions for too long shareholders or the board of directors will replace them
D)both (b) and (c)

Question

Quizplus · Accepted Answer

Microeconomic theory posits that firms aim to maximize profits as a fundamental principle. While not all managers may always align their goals with investors, the underlying assumption is that profit maximization is a key driver for business decisions. Smaller firms are particularly focused on profit due to their scale and resource constraints, making it a dominant factor in their decision-making. Additionally, for larger firms, if managers consistently make decisions that do not prioritize profit maximization, they risk intervention from shareholders or the board of directors, who have the power to replace them to ensure the firm's profitability and health. This rationale combines both the practical considerations of smaller firms (B) and the governance mechanisms in place for larger firms (C), making option D the correct answer.

Microeconomic Theory Assumes That All Firms Maximize Profits Because