Business objectives on a cost and revenue diagram

Overview

Recall questions on locating each objective on a diagram, and on how output and price compare between them.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   On a cost and revenue diagram, how is the profit-maximising output identified?

   Model answer

   It is found where the MC curve intersects the MR curve from below.

2. 2

   On a standard revenue and cost diagram, at which specific point is the revenue-maximising level of output identified?

   Model answer

   Where the marginal revenue (MR) curve crosses the horizontal axis (i.e. where MR = 0).

3. 3

   Explain why a firm maximises total revenue at the output level where MR equals zero.

   Model answer

   Total revenue increases as long as MR is positive; once MR becomes negative, additional units reduce total revenue. Therefore, total revenue is maximised precisely where MR = 0.

4. 4

   If a firm's MR curve has not yet reached the horizontal axis, what does this indicate about its current output relative to revenue maximisation?

   Model answer

   The firm is producing below the revenue-maximising output; it could increase total revenue by expanding output until MR = 0.

5. 5

   On a diagram showing average cost and average revenue curves, how is the sales-maximising level of output determined?

   Model answer

   It is found at the output where the AC curve intersects the AR curve.

6. 6

   Why does the intersection of the AC and AR curves represent the sales-maximisation point?

   Model answer

   At this point AR = AC, so the firm earns normal profit (zero supernormal profit). It is the maximum output the firm can sell while still covering all its costs, meaning any further expansion would result in losses.

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