6. Sales maximization Although economists normally assume that firms are profit-

Question

6. Sales maximization Although economists normally assume that firms are profit-maximizing, firms may also have other objectives. For example, a firm might choose prices and output quantities that maximize total revenue, or sales, rather than profit. Although this objective may not be in the best interests of the firm's owners, the manager of the local branch of a firm may receive a bonus based on the branch's sales. Firms that maximize revenue, or sales, rather than profit are thus not uncommon Consider the daily market for DVDs. Assume that this firm is not a price taker and is therefore free to set prices according its own objective. The following graph shows the demand, marginal revenue (MR), average cost (AC), and marginal cost (MC) curves for this market. 40 35 Profit Max PQ 30 25 Sales Max PQ 20 15 Scratch TR/Profit 10

Explanation / Answer

a.

Profit maximisation is at a point where the marginal revenue equals the marginal cost.

Rvenue is maximised where the marginal revenue is zero.

Total revenue is price times the quantity.

Profit = total revenue - total cost.

b. Lower price & more quantity.

In order to maximise profits, the firms would lower the price to attract more buyers and less more to gain revenue.

c.

under profit max under revenue max price $25 $20 Quantity 15 20 Total revenue $375 $400 Profit $105 $80

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