<p>I've got a basic question regarding cost-benefit analysis of two potential scenarios:</p>
<p><strong>Scenario A</strong></p>
<p>A firm  has a monthly revenue of I dollars with no associated cost, such that its net profit P1 = I.</p>
<p><strong>Scenario B</strong></p>
<p>A firm has a constant stream of revenue of I dollars per month with no cost attached, just like in Scenario A. In addition, it can choose to incur a monthly cost of C dollars in order to make a separate revenue of R dollars per month, such that its net monthly profit is P2 = (R - C) + I.</p>
<p>My question is: Would the business prefer Scenario B to Scenario A?</p>
<p>From my understanding, the business <strong>would</strong> prefer Scenario B to Scenario A as long as C plus transaction costs, if any, is less than R, but I want to know if I am missing anything in the analysis, or if there are any other nuances to consider.</p>

CC BY-SA 4.0
2022-02-02T10:29:09.587Z
"*Would the business prefer Scenario B to Scenario A?*" well, what are the objectives of the business?
Giskard
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2022-02-02T10:44:23.873Z
Assume the objective is to maximize profit
Joebevo
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2022-02-02T11:36:10.513Z
If that is the only objective, then it seems like you are asking when P2 is larger than P1? But it seems like you have already answered that?
Giskard
CC BY-SA 4.0
2022-02-02T11:38:54.007Z
Yeah, just wanted to confirm. BTW, what ARE the other objectives a firm could have?
Joebevo
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2022-02-02T11:40:45.657Z
I thought profit maximization was the primary motive.
Joebevo
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2022-02-02T11:59:17.713Z
@Joebevo in basic models profit maximizing is the main objective but in more nuanced models you could have things like managerial utility, empire building behavior (maybe owners cares about his or hers legacy and is willing to sacrifice profit just to make firm as big as possible) etc. ultimately it’s all some sort of utility maximization but once you get to more complex models it’s not necessary that maximizing profit also maximizes the owners utility that’s just simplifying assumption in simple models or in areas where it’s reasonable to say firms care only about profit
1muflon1
<optimization><cost>
A basic cost-benefit analysis between two scenarios
Joebevo
# A basic cost-benefit analysis between two scenarios

(Asked by: username_0 on 2022-02-02)

I've got a basic question regarding cost-benefit analysis of two potential scenarios:

**Scenario A**

A firm has a monthly revenue of I dollars with no associated cost, such that its net profit P1 = I.

**Scenario B**

A firm has a constant stream of revenue of I dollars per month with no cost attached, just like in Scenario A. In addition, it can choose to incur a monthly cost of C dollars in order to make a separate revenue of R dollars per month, such that its net monthly profit is P2 = (R - C) + I.

My question is: Would the business prefer Scenario B to Scenario A?

From my understanding, the business **would** prefer Scenario B to Scenario A as long as C plus transaction costs, if any, is less than R, but I want to know if I am missing anything in the analysis, or if there are any other nuances to consider.

**Tags:** optimization, cost
> **Comments:**
> **username_1**: "*Would the business prefer Scenario B to Scenario A?*" well, what are the objectives of the business?  
> **username_0**: Assume the objective is to maximize profit  
> **username_1**: If that is the only objective, then it seems like you are asking when P2 is larger than P1? But it seems like you have already answered that?  
> **username_0**: Yeah, just wanted to confirm. BTW, what ARE the other objectives a firm could have?  
> **username_0**: I thought profit maximization was the primary motive.  
> **username_2**: @Joebevo in basic models profit maximizing is the main objective but in more nuanced models you could have things like managerial utility, empire building behavior (maybe owners cares about his or hers legacy and is willing to sacrifice profit just to make firm as big as possible) etc. ultimately it’s all some sort of utility maximization but once you get to more complex models it’s not necessary that maximizing profit also maximizes the owners utility that’s just simplifying assumption in simple models or in areas where it’s reasonable to say firms care only about profit  

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## 0 answers

