Business objectives and revenue

Question 1

What is profit maximisation?

Answer 1

firm aim to make the maximum profit possible (occurs where MC = MR; this is also the loss-minimising condition)

Question 2

What is revenue maximisation?

Answer 2

firm aims to maximise total revenue (occurs where MR = 0)

Question 3

What is sales maximisation?

Answer 3

firm aims to have largest market share without running at a loss (occurs where AC = AR)

Question 4

What is profit satisficing?

Answer 4

managers aim to make enough profit to satisfy the shareholders

Question 5

Draw a diagram showing the different business objectives

Answer 5

Profit-maximisation occurs at output Q1, where MC=MR
Revenue maximisation occurs at Q2, where MR=0
Sales maximisation occurs are Q3, where AC=AR

Question 6

What is total revenue?

Answer 6

quantity sold x price; TR = Q x P

Question 7

What is average revenue?

Answer 7

revenue per unit sold; AR = TR/Q

Question 8

What is marginal revenue?

Answer 8

the change in TR when one more unit is sold; MR = change in TR/change in Q

Question 9

What is a price maker?

Answer 9

a firm with some market power that can alter prices

Question 10

What is a price taker?

Answer 10

a firm with no market power, selling at the market price only

Question 11

Describe profit satisificing on this graph

Answer 11

Managers can choose any output between Q1 and Q2, depending on their objectives, because between these output levels, there is enough profit to satisfy the shareholders.

Question 12

Describe MR and AR for price makers

Answer 12

For price makers: Marginal Revenue (MR) is less than Average Revenue (AR), because to sell additional units, the price of all units needs to be lowered. TR is max when MR = 0

Question 13

Describe MR and AR for price takers

Answer 13

For price makers: Marginal Revenue (MR) is equal to Average Revenue (AR), because every unit is sold at exactly the same price. TR is upwards sloping with constant gradient