Question

We assume that a firm acts so as to maximize profit. In our theory, this is easy, as the firm knows its technology, and all the prices with certainty. But in real life, firms often make decisions under the conditions of true uncertainty (not even risk), when much of the information necessary to figure out the profit maximizing course of action is not available, and so a maximization problem cannot be formulated, much less solved. Is the theory of the firm still useful in understanding how the market works, and if so, why?

Answer 1

Yes it is still very useful . The theory of firm not only tells us about the profit maximizing output but also about the input combination that gives us the profit maximizing output . The theory is important to understand input demand and price of inputs accordingly . Also the theory of the firm tells us about the break even and shut down price of the firm .

Even if there is hidden information and uncertain prices still the theory of firm can help us to draw conclusions regarding the price range of the product . Profit is maximized when marginal revenue is equal to marginal cost .