There are problems with using the "profit maximization" criterion. Which of the following is/are correct? I. Profit maximization has an ambiguous definition of "maximizing profits".
II) Profit maximization fails to consider risk.
A) I only
B) II only
C) Both I and II
D) Neither I nor II

Question

Quizplus · Accepted Answer

I is correct because there are different ways to define and measure profits, such as short-term vs long-term profits, accounting profits vs economic profits, and so on.

II is correct because profit maximization does not consider the level of risk associated with achieving those profits. A firm may choose a strategy that maximizes profits but involves high risk, which can lead to bankruptcy or other negative outcomes in the long run. Therefore, other criteria such as risk-adjusted returns or stakeholder value may be more appropriate for decision-making.

There Are Problems with Using the "Profit Maximization" Criterion