We assume that a firm acts so as to maximize profit. In our theory, this is easy, as the firm knows its technology, and all the prices with certainty. But in real life, firms often make decisions under the conditions of true uncertainty (not even risk), when much of the information necessary to figure out the profit maximizing course of action is not available, and so a maximization problem cannot be formulated, much less solved. Is the theory of the firm still useful in understanding how the market works, and if so, why?

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The theory of the firm which assumes profit maximization under conditions of certainty is a simplified model that may not fully capture the complexiti... View the full answer