How Could the Assumption of Profit Maximization Be Justified

question 20

Multiple Choice

How could the assumption of profit maximization be justified?

• A)The managers of a commercial firm who do not seek profit maximisation are more likely to lose their jobs, so only profit maximisers will survive.
• B)Business scandals such as those that took place at Enron and Ahold prove the wrongness of this assumption; therefore nobody should try to justify it
• C)It cannot be justified and is only an easy and common way to overcoming the difficulty to define the ultimate goal of the firm
• D)It does not need to be justified because it is a basic assumption of business.

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Definitions:

Acquisition Differential

The difference between the purchase price of a company and the fair value of its identifiable net assets at the time of acquisition.

Amortized

The process of spreading the cost of an intangible asset over its useful life, or the gradual reduction of a debt through regular payments of principal and interest over a set period.

Undervalued Equipment

Equipment whose market value is higher than its book value or valuation on financial statements, suggesting it may be worth more than it appears.

Non-Controlling Interest

A share in the equity and profits of a subsidiary that are not owned by the parent company.