Answer to Question #100268 in Microeconomics for Olaitan Kolawole

Question

Compare and contrast the proposition of the Baumol and Marris theory of firm

Answer 1

In both models the growth of demand for the product of the firm is maximised subject to some constraints. Baumol measures growth of demand in terms of the change in sales revenue, while Marris measures growth of demand on terms of the diversification rate. Also, in both model profit is endogenously determined. Baumol and Marris assumes that retained profits are the main source of financing growth of sales.

In Baumol`s dynamic multi period analysis, growth and profits are always competing goals in equilibrium while in Marris model the steady balanced growth, profits and growth are non-competing goals so long as the financial policy is kept constant. Both models assume a given price structure, which is arrived at in some way not explicitly discussed. Thus, in both firm price is a parameter rather than a policy variable. Also, in both models average cost pricing practices are implicitly or explicitly assumed