Suppose the utility function for a firm manager is U = π + bQ, where Q is output, π is profit, and b is a negative constant. How would the firm's output compare with what it would be if the manager's objective was to maximize profit?
A) It would be greater than the profit-maximizing output.
B) It would be less than the profit-maximizing output.
C) It would be the same as the profit-maximizing output.
D) None of the statements is correct.

Question

Quizplus · Accepted Answer

Since the manager's utility function includes a negative constant (b < 0) multiplied by the quantity produced (Q), the manager will have an incentive to produce less than what would maximize profit in order to reduce the disutility associated with producing more output. Therefore, the firm's output would be less than the profit-maximizing output.

Suppose the Utility Function for a Firm Manager Is U