Profit, revenue and sales maximisation, and satisficing

Overview

Recall questions on the output rule for each objective, the reasons a firm adopts one over another, and the principal-agent problem behind satisficing.

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

   State the condition that defines the profit-maximising level of output for a firm.

   Model answer

   Profit maximisation occurs where marginal cost equals marginal revenue (MC = MR).

2. 2

   Explain why a firm maximises profit when MC = MR.

   Model answer

   At this output, the additional cost of producing one more unit exactly equals the additional revenue from selling it; producing more would add more to costs than revenue, and producing less would forgo profitable units.

3. 3

   What would happen to a firm's profit if it produced beyond the MC = MR output level?

   Model answer

   Profit would fall because the additional cost of each extra unit would exceed the additional revenue gained from selling it.

4. 4

   Why does a revenue-maximising firm not stop at the profit-maximising output?

   Model answer

   Because at the profit-maximising output MR is still positive, so expanding output further still increases total revenue until MR reaches zero.

5. 5

   Explain why total revenue is maximised when MR = 0.

   Model answer

   At this output, total revenue is at its maximum because any additional unit sold would reduce total revenue (MR would become negative).

6. 6

   If a firm is making supernormal profit, can it be sales maximising?

   Model answer

   No, a sales-maximising firm produces where AC = AR, earning only normal profit with zero supernormal profit.

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