Rationality of management in not trying to maximize profits.
Explanation of Solution
The shareholders of the management would like to maximize their profit from the firm. But this will not be the case with the managers of the firm. There will be many different goals in a management. The main objective of the firm will be to maximize their reputation in the economy, increase their reach in the society and to create a well name and dignity in the society. When these goals are in front of the firms, they cannot go blindly towards the profit maximization.
Similarly, there are many non-profit organizations and co-operative organizations that works mainly to provide maximum service to the society and not to maximize the profit from the operation of the institutions. They will not have the profit maximization objective in their main objectives.
Even the managers of the firms will have different goals such as the increment of salary, creating a good name and dignity in the society as well as avoidance of risk from the decisions. Such goals of the managers would retract them from taking the steps towards the profit maximization in the economy. This indicates that the rational behavior is not necessarily equivalent to profit maximization. The defining of rational behavior indicates that the people try to maximize their goals which are deep in their mind.
Profit: The profit is the excess revenue made by the firm after deducting the total expenses from the total revenue generated by the firm in the market.
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Chapter 8 Solutions
Economics: Principles & Policy
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