Business Objectives
~35 min · WEC13 · 3.3.1
WEC13 · 3.3.1 · 35 min
A firm doesn't automatically — it maximises whatever the person actually making the output decision is rewarded for, and that person is usually not the owner.
Before you read on
Two or three questions on exactly what this lesson teaches. Being wrong here is fine — it's the fastest way to find out what to pay attention to next.
Why MR = MC, before any of the four objectives
In plain terms
You run a lemonade stand. Making one more cup — lemons, sugar, the cup itself — costs you 20 cents, every single cup, no matter how many you've already made. Selling more cups is different: your stall is small, so to sell more you have to drop the price a bit, and you have to drop it for everyone, not just the new customer. Say your price starts at $1.05 and 1 cup sells. Cup 2 needs a lower price — $1.00 — but now BOTH cups sell at that price, so you don't just gain what cup 2 sold for, you also gave up a nickel on cup 1. Keep going, one cup at a time, and track only the money you *gained* by making that one extra cup: cup 2 gains 95 cents, cup 3 gains 85 cents, cup 4 gains 75 cents — it keeps shrinking, cup after cup, because each new cup needs a lower price on everything you're already selling. By cup 9, making one more cup gains you only 25 cents — still more than the 20 cents it cost to make, so make it, you're 5 cents better off. But cup 10 gains you only 15 cents, and it still costs 20 cents to make — that cup loses you 5 cents. Stop at 9. Check it against total profit directly, cup by cup: profit rises the whole way to 9 cups ($4.05), and falls the moment you go to 10 ($4.00) or beyond — 9 really is the best stopping point, not just a rule that sounds right.
Give the two things you were tracking their real names. The 20 cents it costs to make one more cup is marginal cost (MC) — the cost of the next unit, not the average of all of them. The money gained from selling one more cup — what changed in your total revenue — is marginal revenue (MR), and it fell below the actual selling price precisely because you had to cut the price on every earlier cup too, not just the new one. The stopping rule you found by trial and error — keep going while the next cup gains you more than it costs, stop the moment it wouldn't — is exactly "produce while MR > MC, stop where MR would fall below MC."
Formally
Profit maximisation stops at MR = MC. In the lemonade stand, output is countable in whole cups, so the stopping point is the last cup where MR is still at least MC (cup 9: MR 25c ≥ MC 20c) — one cup before the first one where it wouldn't be (cup 10: MR 15c < MC 20c). A firm whose output is finely divisible — barrels of oil, kilowatt-hours, anything sold in continuous quantities rather than one lemonade cup at a time — can adjust output in amounts too small to jump straight past the exact point where MR and MC meet, so for those firms the condition holds as a genuine equality, MR = MC exactly, not just "the last profitable unit." The worked derivation below uses that continuous version, which is why it can solve MR = MC directly for a single output figure rather than checking cups one at a time — same rule, expressed the way it actually behaves once output stops being countable in whole units.
Four objectives, one underlying question
Every model of the firm answers the same question: at what output does the firm stop? Pearson's spec names three maximising objectives — profit, revenue, sales volume — plus satisficing as a fourth, non-maximising alternative. All four answer "where does the firm stop" differently, and the difference between them is entirely about *whose* payoff is being maximised, not about disagreement over the underlying economics.
Profit maximisation stops at MR = MC — the output where the last unit sold adds exactly as much to revenue as it costs to produce. Go one unit further and MC exceeds MR, so that unit loses money; stop one unit short and you're leaving MR-minus-MC of profit on the table. This is the owner's objective, because profit is literally what an owner receives.
Revenue maximisation stops at MR = 0 — the output where selling one more unit adds nothing further to total revenue. Beyond this point MR turns negative: an extra unit sold actually reduces total revenue, because the price cut needed to sell it costs more, on every existing unit, than the extra unit is worth. This is a manager's objective when their pay is tied to sales revenue rather than profit.
Incentive pay isn't the only reason a firm would rationally choose revenue maximisation, though — it can be a deliberate strategy in its own right. Pearson's own real mark scheme for this exact essay question (Jan 2022: JBS, the world's largest meat processor by sales, whose revenue from China rose 60% in a single quarter) credits several distinct reasons. Producing at Q2 instead of Q1 raises output and sales directly, increasing market share; and growing toward that larger output can pick up economies of scale on the way, pulling average cost down further than the smaller profit-maximising output would. In the short run specifically, a firm entering a new market may deliberately run at MR=0 just to establish itself there before profit becomes the priority — the mark scheme anchors this reasoning to a firm doing exactly that in China. Where barriers to entry are low, revenue maximisation can double as deterrence: producing more and pricing lower than the profit-maximising point makes the market look less attractive to a would-be entrant. And where demand is elastic, a firm can raise revenue by keeping price low rather than raising it toward the profit-maximising level, since MR is still positive on the elastic portion of demand. A further reason is practical rather than strategic: profit maximisation needs MC and MR calculated precisely, and a firm doesn't always have the information to do that — the real Jan 2026 mark scheme for this exact essay question ("Evaluate the advantages of revenue maximisation for a business") credits revenue maximisation directly on these grounds, verbatim: "It may be easier for a business to target revenue, rather than an alternative business objective e.g. profit maximisation as they do not always have access to information to calculate their MC and MR." None of this makes revenue maximisation permanent, though: it's frequently pursued only in the short run, to build market share and monopoly power the firm can exploit once it switches toward profit maximisation later — exactly the evaluative point examiners reward, and the trap below expands on when that switch is likely.
Sales volume maximisation stops at AR = AC — average revenue equal to average cost, meaning total revenue equals total cost and the firm earns only normal profit (zero *supernormal* profit). This is the largest output a firm can produce without making a loss. It's the objective of a manager rewarded for market share or unit volume, constrained only by not wanting to actually lose money.
Satisficing isn't a fourth output rule — it's the admission that real firms are run by both a principal (the shareholders, who want profit) and an agent (the managers, who actually choose the output) at once. The spec doesn't give satisficing a formula, and that's not an omission: a satisficing firm produces *somewhere* between the profit-maximising and sales-maximising output — enough profit to keep shareholders from intervening, with the rest of the output decision left to whatever the managers themselves want. There's no single point to solve for, because the exact spot depends on how much profit shareholders will tolerate losing before they act.
Mechanism
Why the four objectives give four different outputs
The mechanism is the principal-agent problem, spec point 3.3.1(b): shareholders own the firm and want maximum profit, but in any firm large enough that ownership and management have separated, the people actually choosing the output are managers — and managers are paid on something else. A manager paid a fixed salary plus a revenue bonus is, mechanically, solving a different optimisation problem than a shareholder would: they're maximising their own payoff function, which happens to track revenue, not profit. This isn't managers behaving badly — it's what rational incentive-following looks like once you stop assuming the person making the decision is the person who owns the outcome. The size of the gap between what shareholders would choose (Q1) and what managers actually choose (Q2 or Q3) is a direct, measurable consequence of how the manager is paid, which is exactly what spec 3.3.1(b) is testing when it asks about the *significance* of the divorce of ownership from control, not just its existence.
Worked, in full
Deriving the output ordering from first principles — not asserting it
- 01
Start from a linear demand curve, P = a − bQ. Total revenue is TR = PQ = aQ − bQ², so marginal revenue is MR = a − 2bQ: it shares demand's intercept a and falls twice as steeply — the standard result, derived rather than quoted.
Earns: K — the formal relationship between AR and MR, derived rather than asserted (rubric FP).
- 02
Profit-maximising output Q1 solves MR = MC. Since MC > 0 for any real firm, MR at Q1 is still positive — the firm hasn't yet reached the output where an extra unit adds nothing. Because MR falls continuously as Q rises, MR only reaches exactly zero at some larger output. Call that Q2. So Q2 > Q1 — not by convention, but because MR is positive at Q1 and MR is decreasing.
Earns: An1 — Q2 > Q1 derived from the sign of MR at Q1, not stated as a rule to memorise.
- 03
Total profit π(Q) = TR(Q) − TC(Q) rises while MR > MC and falls once MR < MC — so π peaks exactly at Q1 and falls continuously for every Q beyond it. Sales-volume-maximising output Q3 is defined as where profit reaches zero (AR = AC, so TR = TC). Since π is strictly falling throughout (Q1, ∞) and is still positive at Q1's neighbourhood, the zero-profit point Q3 comes later than any point where profit is still positive.
Earns: An2 — Q3 defined as the zero-profit point on a monotonically falling profit curve, not just labelled on a diagram.
- 04
Whether Q2 falls before or after Q3 therefore depends on one empirical fact: is profit still positive at the revenue-maximising output? In every case a real exam question will give you — a firm with genuine market power, not one operating at a knife-edge — yes, which places the outputs in the order Q1 < Q2 < Q3 that every diagram assumes. State that assumption once, in one sentence, and you've shown the examiner you understand it's an assumption, not a law.
Earns: Stage 5 — the boundary case named explicitly: the ordering assumes profit is still positive at Q2, true for any firm with real market power, false only at a knife-edge case an exam won't ask you about.
x-axis: Quantity of output, Q · y-axis: Price and cost, £
- AR = D
- Downward-sloping average revenue / demand curve.
- MR
- Below AR, same price-axis intercept, twice the gradient — derived above, not assumed.
- AC
- U-shaped average cost.
- MC
- U-shaped marginal cost, crossing AC at AC's minimum.
- Q1, P1
- Profit-maximising output and price — where MR = MC. Smallest output, highest price of the three.
- Q2, P2
- Revenue-maximising output and price — where MR = 0.
- Q3, P3
- Sales-volume-maximising output and price — where AR = AC, so P3 = AC at that output.
Common error: Drawing only the profit-maximising diagram and labelling Q2/Q3 without showing where MR actually crosses zero or where AR actually meets AC.
Correct: All three output levels marked on the same diagram, each traced to the curve intersection that defines it — the diagram itself is the evidence for the ordering, not a label stuck onto a generic monopoly diagram.
In your own words
In one sentence: why does a manager paid on revenue, not profit, choose to produce more than the profit-maximising output rather than less?
Complete it yourself
Complete the chain — divorce of ownership from control
- 01
In a large public company, the shareholders who own the firm are not the people who run it day to day.
- 02
Ownership (the shareholders) and control (the managers) have separated — the divorce of ownership from control.
Named traps
- amazon-is-not-a-confirmed-revenue-maximiser
- A claim that circulated in this course's own prior material: "the WEC13 mark scheme confirms Amazon as a revenue maximiser." Independently re-checked against the real Jan 2024 mark scheme — it says the opposite. The verified mark-scheme fragment reads: "...shareholders such as Amazon. Many private sector firms offer shares to their..." — the real Jan 2024 question-paper stem supplies the context this refers to: "Jeff Bezos owns 12.7% of Amazon shares and works as the Executive Chair of the board of directors. By contrast, Daniel Kretinsky owns 22% of the shares in the UK's Royal Mail Service but he does not work for the company." Amazon is cited as a firm where a senior manager (Bezos) also holds a significant shareholding — the mark scheme's point is that this kind of stake works against, not for, divorce of ownership from control, crediting it toward profit-maximising reasoning rather than revenue-maximising. Using Amazon as your revenue-maximisation example in an exam answer would be citing the mark scheme backwards.
- objectives-differ-vs-firms-remain-small
- "Evaluate why the objectives of large and small firms differ" and "explain why some firms remain small" are different questions that share surface vocabulary. The confirmed examiner report — June 2023, on the Malaysia SME question — records candidates overwhelmingly answering the wrong one, verbatim: "Sadly, the vast majority of candidates misinterpreted this question and provided reasons why firms remain small. These answers provided significant amounts of irrelevant and pre-learned material that could only achieve a Level 1. This caused the mean score on this essay to be very low compared to the other essays and compared to previous exam series." A separate line in the same report adds: "Very few candidates achieved Level 4 on this essay." The fix: "objectives differ" needs the principal-agent mechanism (large firm → separated ownership → manager pursues revenue/growth; small firm → owner-manager → objectives stay aligned by default). "Remain small" needs constraints on growth (market size, finance access, owner preference) — a completely different content area, spec point 3.3.1(2), not 3.3.1(3).
- no-diagram-caps-the-level
- Every WEC13 essay mark scheme checked this session carries some form of the instruction that a response without an appropriate diagram cannot reach the top level, regardless of how good the written reasoning is. On an objectives question specifically, that means drawing the combined AR/MR/AC/MC diagram with Q1, Q2 and Q3 all marked — not a generic monopoly diagram with no output levels identified.
- satisficing-is-not-a-fourth-point-on-the-diagram
- The spec gives formulae for three objectives — profit, revenue, sales-volume maximisation — and pointedly does not give one for satisficing. Marking a precise "Point A" for satisficing on the diagram overstates what the model actually claims: satisficing is a range (somewhere between Q1 and Q3, bounded by shareholders' minimum acceptable profit), not a specific solvable intersection. Describe it as a range with the correct boundary condition, not a fourth precise point.
- unconditional-conclusion
- "On balance, revenue maximisation is the dominant objective for large firms" is an unconditional claim, and every mark scheme checked this session caps evaluation at the middle band without a stated condition. State what would have to be true for the conclusion to hold — see the conditional-judgement drill below — in the same sentence as the conclusion, not as an afterthought.
- revenue-max-is-not-a-permanent-state
- The real Jan 2022 mark scheme for this exact essay question — "Evaluate the view that revenue maximisation is always the main objective of a firm," anchored to JBS, the world's largest meat processor, whose total revenue from sales to China rose 60% in a single quarter — credits an evaluative axis entirely separate from the ownership/equity-stake argument drilled above. Verbatim: "Revenue maximisation may only be a short-run objective" and "The firm may wish to change its objective in the long-run when the firm is more established and can increase prices more easily/market conditions may change." A second, distinct axis: "Level of contestability will impact the objectives of the firm, the higher the barriers to entry the more likely the firm will be profit maximising." A third: "Firm survival for small or new firm in the industry" may dominate over any maximising objective at all, regardless of who owns or manages the firm. An answer built entirely on the principal-agent/equity-stake argument, however well developed, only covers half of what this exact question credits — the examiner report for this series specifically praises candidates who "refrained from generic points such as opportunity cost and time frame" and instead reached for question-specific conditions like these.
- revenue-max-carries-real-costs-of-its-own
- The trap above ("revenue-max-is-not-a-permanent-state") covers conditions under which a firm switches AWAY from revenue maximisation. That's a different evaluative axis from this one: the real Jan 2026 mark scheme — "Many new businesses have revenue maximisation as their business objective. Evaluate the advantages of revenue maximisation for a business" — credits a cluster of genuine disadvantages that apply even while a firm is still successfully revenue-maximising, not conditions for switching away from it. Verbatim, five distinct mechanisms: growing revenue can push a firm past its efficient scale into diseconomies of scale — "rising long-run average costs — and therefore falling profit"; chasing revenue growth can leave a firm "dynamically inefficient" and unable to "respond to the changing needs of its customers"; for "a large business which has a stock market listing," targeting revenue instead of profit can make "the share price of the business... fall," since shareholders need profit paid out as dividends; producing beyond the profit-maximising output risks a business being "left with high levels of unsold products/stock which cannot be sold if there is a downturn in the market"; and a firm perceived to be maximising revenue "unfairly" may "attract the attention of the competition authorities." A strong answer therefore needs two separate evaluative moves, not one: the conditions under which the objective itself changes (the trap above), AND the direct costs of the objective while it's still in force (this one).
The conditional move
Complete: "Revenue maximisation is likely to dominate a large firm's objective only if ___."
Complete: "Satisficing is a more accurate description of a firm's behaviour than pure profit maximisation only if ___."
Beyond the spec
Pearson's spec names zero economists for this topic — every formula is examinable without knowing who derived it. Knowing the theory anyway is what separates an answer that states the rule from one that can defend it under an unfamiliar question, and it's genuinely absent from every free resource checked for this topic.
Four names carry the objectives beyond "managers might not maximise profit": William Baumol (1959, revised 1967) modelled a manager maximising total revenue subject to a minimum-profit constraint set by shareholders — not an unconstrained revenue chase, a constrained one, which is the more defensible version of the revenue-maximisation story. Robin Marris (1964) modelled managers maximising the firm's balanced growth rate subject to a minimum share-valuation constraint that keeps takeover risk tolerable — note precisely what this is not: it is not "produce where AR=AC," a specific misattribution independently found this session in one of the most-used free revision PDFs for this exact topic. Richard Cyert and James March (1963) modelled the firm as a coalition of groups with different sub-goals, introducing organisational slack — resources paid out above the minimum needed, which absorb shocks and fund what managers actually want to do once shareholders are satisfied; Herbert Simon (who won the 1978 Nobel Memorial Prize partly for this) had already named the underlying mechanism in 1955-56 as satisficing — bounded rationality meets an aspiration level, take the first option that clears it, because true optimisation is usually infeasible under real information and time constraints. And on divorce of ownership from control specifically: Berle and Means's 1932 description of it as the normal condition of the large corporation is often taught as a universal law. It isn't one — La Porta, Lopez-de-Silanes and Shleifer's 1999 study of corporate ownership worldwide found that widely-dispersed shareholding of the kind Berle and Means described is largely an Anglo-American pattern; most large firms elsewhere are controlled by a concentrated family or state stake. For an International A-Level, that's not a footnote — a meaningful share of the people sitting this exam live in exactly the economies where the textbook default doesn't hold, which is itself a legitimate evaluative point about the limits of the divorce-of-ownership model. One more complication, this one aimed at profit maximisation itself rather than at alternatives to it — not from the academic literature but from Pearson's own Getting Started Guide for this qualification, which frames it this way: "Keynesian economists believe that firms will try to maximise their long-run rather than short-run profits. This is based on firms using cost-plus pricing where firms calculate the average cost and add a mark-up. Firms will adjust price and output in response to changes in market conditions. However, rapid price changes may affect a firm's position in the market. Consumers dislike rapid price changes, and may see price reductions as signs of a firm's desperation and distress. So rather than adjusting prices rapidly they will continue to charge the current price and may make a loss in the short term but will adjust the price to the profit maximising point in the long term." The mechanism worth pulling out: MR=MC describes where profit ends up, not how a firm actually sets a price day to day — most real pricing is cost-plus (average cost plus a mark-up), held deliberately sticky because a price that visibly jumps around reads to customers as a signal of trouble, not responsiveness. A firm can tolerate a short-run loss rather than chase MR=MC in real time, precisely because chasing it would cost more in reputation than it saves in that period's profit — and still be a profit maximiser, just over the long run rather than the short.
Retrieval — with feedback on every choice
A firm faces the demand curve P = 100 − 2Q and has constant marginal cost of £20. At which output is total revenue maximised?
Which one of the following is most likely to reduce the size of the divorce of ownership from control inside a firm?
A firm switches its objective from profit maximisation to sales volume maximisation. What happens to its supernormal profit?
A logistics company's founder-CEO holds 18% of its shares and sits on the board. Its main competitor is run by a professional CEO who holds under 1% of shares and is paid a salary plus an annual bonus tied to total revenue.
Explain, using the principal-agent problem, why the two firms are likely to choose different output levels even if they face identical costs and demand.
Same question, every level
Some economists argue that once a firm grows large enough for ownership and management to separate, revenue maximisation inevitably takes over from profit maximisation as its real objective. Assess this argument. (VERIDIAN-original question, testing the same content area as real WEC13 essays on this topic — e.g. Jan 2022 Q10 — but independently worded, not a lightly-reworded copy of any single past-paper question.)
20 marks available
Revenue maximisation is when a firm tries to sell as much as possible. Some firms do this, others try to make the most profit instead. It depends on the firm.
Descriptive, no formula, no mechanism, no diagram. "It depends on the firm" gestures at the right idea without demonstrating it.
- Profit max: MR=MC. Revenue max: MR=0. Sales-volume max: AR=AC (π=0). Satisficing: a range, not a point.
- Output order: Q1 < Q2 < Q3 (assumes profit still positive at Q2 — say so once).
- No diagram = capped below top level. Combined diagram: all three Q's traced to their defining intersection.
- Amazon in the real mark scheme = owner-manager alignment → profit-max reasoning, NOT a revenue-maximiser.
- "Objectives differ" ≠ "firms remain small" — different spec points, don't conflate them.
- Revenue-max isn't just incentive pay: also credited for market share, EoS from growth, short-run market entry (e.g. China, Jan 2022), deterring low-barrier entry, and elastic demand — plus simply not always having the MC/MR data to profit-max instead (Jan 2026).
- Revenue-max rarely lasts: high barriers to entry favour profit-max instead, and firm survival can dominate for a small/new entrant — say so before concluding it's "always" the objective.
- Revenue-max also has real costs WHILE pursued, not just conditions for switching away from it (Jan 2026): diseconomies of scale, dynamic inefficiency, a falling share price for a listed firm, overproduction/unsold stock, and competition-authority scrutiny.
Not affiliated with or endorsed by Pearson Edexcel. Every quotation and figure attributed to a mark scheme or examiner report in this lesson was independently verified against the primary Pearson document, not carried over from prior course material.
A firm faces the demand curve P = 100 − 2Q and has constant marginal cost of £20. At which output is total revenue maximised?
- AQ = 20
This is the profit-maximising output (MR=MC: 100−4Q=20 → Q=20), not the revenue-maximising one — check which condition the question actually asks for.
- Q = 25
Correct. TR = 100Q − 2Q², so MR = 100 − 4Q. Revenue is maximised where MR=0: 100−4Q=0 → Q=25.
- CQ = 50
This is where price would hit zero on the demand curve (100−2Q=0), not where marginal revenue hits zero — a common slip that confuses AR=0 with MR=0.
- DQ = 40
This is what you get from solving AR=MC instead of MR=MC (100−2Q=20 → Q=40) — using the demand/AR curve where the MR curve belongs. It isn't a solution to either exam-relevant condition (MR=MC gives Q=20, MR=0 gives Q=25); the giveaway is a formula mix-up, not an arithmetic slip.
Traps tested: Solved wrong condition · Confuses ar and mr zero · Confuses ar and mc
Which one of the following is most likely to reduce the size of the divorce of ownership from control inside a firm?
- AIncreasing the number of individual shareholders, each holding a small stake
This increases dispersion, which widens the gap between ownership and control rather than closing it — more, smaller shareholders means less individual monitoring capacity, not more.
- Paying senior managers partly in company shares
Correct. Share-based pay gives managers a direct financial stake in the firm's profit and share price — the same incentive shareholders have — which is exactly the mechanism the WEC13 mark scheme credits Amazon-style owner-manager alignment with.
- CIncreasing the manager's fixed salary with no performance-linked element
A larger fixed salary doesn't tie the manager's payoff to profit at all — it removes performance incentives rather than aligning them, so it doesn't close the gap.
- DListing the company on a stock exchange for the first time
A first listing typically increases the number of dispersed external shareholders relative to the founding owner-managers — widening, not narrowing, the separation between ownership and control.
Traps tested: Direction reversed · Confuses pay level with pay structure
A firm switches its objective from profit maximisation to sales volume maximisation. What happens to its supernormal profit?
- It falls to zero
Correct. Sales-volume maximisation stops at AR=AC — by definition the point where total revenue equals total cost, so supernormal profit is exactly zero (normal profit remains, since normal profit is already inside the cost curve).
- BIt falls, but stays positive
This describes revenue maximisation (MR=0), not sales-volume maximisation. AR=AC specifically drives supernormal profit all the way to zero, not partway there.
- CIt is unaffected, only output changes
Supernormal profit is defined by the gap between AR and AC — moving the output changes that gap by definition, so profit cannot be unaffected.
- DIt becomes negative — the firm makes a loss
Sales-volume maximisation is defined as the largest output at which the firm still just breaks even (AR=AC) — going further would cause a loss, but the objective itself stops exactly at zero supernormal profit, not below it.
Traps tested: Confuses revenue and volume max · Ignores profit output link · Overshoots the boundary
A logistics company's founder-CEO holds 18% of its shares and sits on the board. Its main competitor is run by a professional CEO who holds under 1% of shares and is paid a salary plus an annual bonus tied to total revenue.
Explain, using the principal-agent problem, why the two firms are likely to choose different output levels even if they face identical costs and demand.
- The founder-CEO's firm produces closer to Q1 (profit-max); the competitor produces closer to Q2 (revenue-max), because the founder-CEO's equity stake aligns their incentive with shareholders' profit goal, while the competitor's revenue-linked bonus rewards higher output regardless of profit
Correct, and this is the fully-integrated version: it names the mechanism (equity stake vs. revenue bonus), the direction for both firms, and ties each to a specific output level rather than a vague "different behaviour."
- BBoth firms produce at Q1, because both are ultimately accountable to shareholders
This ignores the entire principal-agent mechanism the question is testing — "accountable to shareholders" in principle doesn't mean the manager's actual incentive is profit-linked in practice, which is exactly what differs between the two CEOs here.
- CThe founder-CEO's firm produces closer to Q2; the competitor produces closer to Q1, because founders take more risks
This reverses the mechanism. A large equity stake pulls a manager's incentive toward the shareholders' objective (profit, Q1), not away from it — "founders take more risks" isn't the relevant mechanism the stimulus is testing.
- DThere isn't enough information to say, since both firms could satisfice instead
The stimulus gives a specific, contrasting incentive structure for each CEO — equity stake vs. revenue bonus — which is precisely what lets you predict a direction. Falling back on "not enough information" ignores the data actually given.
Traps tested: Ignores incentive alignment · Direction reversed · Overclaims uncertainty
Practice this for real
This site teaches the mechanism; the exam is sat on Pearson's own real questions. Go find and attempt these yourself — nothing here substitutes for actually sitting a timed paper.
Pearson's official past-papers portalSelect International Advanced Level → Economics → any series, then look for WEC13.
Up next
Revenue
Marginal revenue hits zero at exactly the output where demand stops being elastic — not by coincidence, but because they're the same fact seen from two different formulae.
30 min