Th3.2: Revenue Maximisation

Question 1

What did William Baumol suggest?

Answer 1

managers are most interested in their level of revenue since this is what their salary depends on

Question 2

Even when their salary is not directly connected to sales revenue…

Answer 2

they knew a growth in revenue was always likely to be positive for a business - it increases their prestige and is used as a justification to shareholders for managerial rewards

Question 3

Why would a fall in revenue be negative?

Answer 3

it would not only reduce their salary but could signal the start of a downward spiral for a company. it could lead to fall in staff and financial institutions may be worried and less willing to lend money

Question 4

As a result, many firms may aim to revenue maximise as long as…

Answer 4

they provide some profit for the owners

Question 5

Refer to PP

Look at Graph 25. Where would firms have to produce to revenue maximise and why?

Answer 5

MR = 0

since if marginal revenue is above 0, producing more would increase revenue

Question 6

This means they produce at ….. whilst profit maximisation would produced at…

Answer 6

they produce at Q2P2

profit maximisation at Q1P1

Question 7

Why would prices be lower than when they are profit maximising?

Answer 7

since they are producing more

Question 8

What is the problem with both sales maximisation and revenue maximisation?

Answer 8

it necessitates a fall in price, which other firms may copy and so there may be no or little increase in revenue or sales - important in oligopoly. also bring lower profits.