A firm will maximize the present value of future profits by maximizing current profits when the:
A) growth rate in profits is constant.
B) growth rate in profits is larger than the interest rate.
C) interest rate is larger than the growth rate in profits and both are constant.
D) growth rate and interest rate are constant and equal.

Question

Quizplus · Accepted Answer

When the interest rate is larger than the growth rate in profits and both are constant, maximizing current profits also maximizes the present value of future profits. This is because the discount factor applied to future profits (due to the interest rate being higher) makes them less valuable compared to immediate profits.

A Firm Will Maximize the Present Value of Future Profits