The profit maximization is not an operationally feasible criterion". Do you agree? Illustrate your views.

Topics: Economics, Finance, Term Pages: 2 (399 words) Published: March 11, 2014
Q.5The profit maximization is not an operationally feasible criterion". Do you agree? Illustrate your views..
A.5. The profit maximization concept does not specify clearly whether it mean short or long-term profit, or profit before tax or after tax. In addition, in the free economy and perfect competition, businessmen pursue their own interests to maximize the profit by utilization of resources in the efficient and effective way.Let us assume that the maximizing the profit means maximizing profit after tax, i.e., net profit as reported by income statement of the business firm. It should be understood that this would not maximize the welfare of the owners if some short-term actions were taken to improve profit. For example, the manager may sell some of the assets and then invest funds in low-yielding assets. The profit after taxes would go up in the short-term but the long-term 1

The profit maximizing objective tries to maximize the profit after tax, i.e., net profit, which in the long term may reduce the net worth of the owner. (This is explained in answer no. 5). The profit maximization concept basically ignores the time value of money and the risk involved in firms activities, which are very well taken care by wealth maximization concept. The profit maximization concept does not specify clearly whether it mean short or long-term profit, or profit before tax or after tax. In addition, in the free economy and perfect competition, businessmen pursue their own interests to maximize the profit by utilization of resources in the efficient and effective way.Let us assume that the maximizing the profit means maximizing profit after tax, i.e., net profit as reported by income statement of the business firm. It should be understood that this would not maximize the welfare of the owners if some short-term actions were taken to improve profit. For example, the manager may sell some of the assets and then invest...
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