Journal of Political Economy Vol. 79 No. 6 1971
Safety Margins and Profit Maximization in the Theory of the Firm
Abstract
In this paper we explore various criteria for risky decision making and examine the relationship among these rules, full cost pricing, and safety margin maximization. The three rules are alternative versions of the "safety-first" principle; each is concerned with expected profits and with the probability of loss. Since the probability of loss can be identified with the firm's margin of safety, these rules can be viewed as alternative ways of making a compromise between expected profit maximization and high safety margins. They result in various output policies which can be most simply characterized as "full cost" or"safety margin" pricing. Rules of thumb related to recovering full cost are therefore explained by the marginal analysis that was supposed by some to refute them.
- DOI
- 10.1086/259836
- Volume
- 79
- Issue
- 6
- Pages
- 1293-1301
- Language
- en
- Sources
- openalex crossref