Explain the reasons firms might follow the Baumol model of maximizing

Explain the reasons firms might follow the Baumol model of maximizing revenue subject to achieving a minimum level of profits.

What will be an ideal response?

ANSWER

Firms might wish to increase their market shares within the industry, managers’ power and prestige tend to grow with an increase in the size of a business’ level of operations, eschewing profit maximization might avoid new firms entering the industry and/or pressure for government regulation, and increases in the scale of a firm’s level of operation might permit capturing cost economies of scale through greater market power to extract lower prices from the firm’s suppliers of inputs.