Suppose the utility function for a firm manager is U =  + bQ,where Q is output,  is profit,and b is a positive constant.How would the firm's output compare with what it would be if the manager's objective was to maximize profit?
A) It would be greater than the profit-maximizing output.
B) It would be less than the profit-maximizing output.
C) It would be the same as the profit-maximizing output.
D) None of the preceding statements is correct.

Question

Quizplus · Accepted Answer

Given the utility function U = π + bQ, where π is profit and Q is output, the manager's utility increases with both profit and output. To maximize utility, the manager has an incentive to increase output beyond the point where profit alone is maximized because the utility gains from producing more output (due to the term bQ) outweigh the potential decrease in profit from producing beyond the profit-maximizing quantity.

Suppose the Utility Function for a Firm Manager Is U