Question

The benchmark models in microeconomic theory assume consumers and firms that act to maximize utility from consumption expenditures and profits, respectively. Discuss whether you think that these assumptions are reasonable and evaluate some potential alternatives.

Answer 1

Most of the models in the microeconomics theory assumes consumers to maximize utility and producers to maximize profits.

In my opinion this assumptions are pretty reasonable.

As usually a rational consumer in the economy will want it's satisfaction derived from the goods to be maximum in order to have gain from the transaction of money.

Also producers usually wants to maximize profits in order to gain from the exchange of products, these profits will be used for consumption, investment.

Economic profits = total revenue - total costs

However there are some alternative motives as well

1 sales maximization- by prof Baumol in which forms try to maximize sales that is money value of sales

2 secure profits - by prof. Rothschild, entrepreneurs try to achieve security that is steady flow of profits for a long time

3 Hall and Hitch's Mark-up pricing

4 staff maximizing - corporatrs try this

5 Growth maximization - corporate managers try to maximize rate of growth or total sales revenue rather than profits