Revenue Maximisation Flashcards
What is revenue maximisation?
Revenue maximisation can be viewed as the output at which total revenue (TR) is at a maximum or the output at which marginal revenue (MR) gained from selling one more unit is zero.
What happens when MR = 0?
When MR = 0, the firm cuts its price to balance the extra revenue received from selling another unit with the reduced price on every item already sold.
When might revenue maximisation be a rational objective?
Revenue maximisation might be rational if a firm has to dispose of all its stock, making costs irrelevant.
What is an example of revenue maximisation in practice?
Supermarkets often sell goods that have reached their sell-by-date at a discount to avoid losses from unsold stock.
What is the principal-agent problem?
The principal-agent problem occurs when a business is owned and managed by different people, leading to differing objectives between shareholders and managers.
How might a firm act if it is about to be taken over?
A firm might try to maximise its revenue to ensure that the sale price is as high as possible.
What pricing strategy does a flower seller use at the end of trading?
The flower seller cuts the price of stock that will spoil before the following day, which is a strategy to maximise revenue.
