Question+115

The maximization of the difference between total revenues collected from selling Q units of output and total costs of producing Q units of output, this is profit maximization, which is our assumption for this question. But, instead of aiming at maximizing profits, firms may wish to maximize revenues.



Profit maximization requires that the firm chooses an output rate where MR = MC and where MC is rising. Assuming an imperfectly competitive firm facing a negatively sloped demand this implies choosing Q1 and setting a price P1 that will absorb this rate of output. If on the other hand revenues are maximized then the firm will choose that rate of output at which MR=0 (since, as long as MR is positive, each extra unit produced and sold adds to revenues so if MR is positive, revenues can not be at a maximum). In the diagram, he firm will chose output Q2 which will be absorbed given demand conditions if the price is set at P2.

Below the same diagram is drawn but this time with the total revenues function right under it so that it is clear that at that level of output (Q2) at which MR is zero, total revenues are the highest: The maximization of the difference between total revenues collected from selling Q units of output and total costs of producing Q units of output, this is profit maximization, which is our assumption for this question. But, instead of aiming at maximizing profits, firms may wish to maximize revenues.



Profit maximization requires that the firm chooses an output rate where MR = MC and where MC is rising. Assuming an imperfectly competitive firm facing a negatively sloped demand this implies choosing Q1 and setting a price P1 that will absorb this rate of output. If on the other hand revenues are maximized then the firm will choose that rate of output at which MR=0 (since, as long as MR is positive, each extra unit produced and sold adds to revenues so if MR is positive, revenues can not be at a maximum). In the diagram, he firm will chose output Q2 which will be absorbed given demand conditions if the price is set at P2.

Below the same diagram is drawn but this time with the total revenues function right under it so that it is clear that at that level of output (Q2) at which MR is zero, total revenues are the highest: