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Business Plan

Autor:   •  September 26, 2011  •  Essay  •  297 Words (2 Pages)  •  1,124 Views

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If the view of the firm being a profit-maximizing entity that sets output where marginal cost equals marginal revenue which is at a price of $38.29.

As to the strategy of revenue-maximization, if the retailer sells a product that has an inelastic demand, it can increase total revenue by increasing its price. This will result in a lower quantity sold, but since marginal costs generally increase with output, this strategy is often consistent with profit-maximization. If the retailer sells a product that has an elastic demand, it can increase total revenue by decreasing its price. This may be inconsistent with short term profit maximization, but at the same time can increase market share. With an increased market share, it could potentially increase long term profits. So this strategy is not necessarily inconsistent with profit-maximization. You may earn more, but the expenses incurred in order to earn more may be more than the actual earning. Hence, more revenue does not mean more profit. As we see in this example total revenue maximizes at a price of $24.07 per unit when 15 units are sold giving total revenue of $360.05 but the profit is -$59.00.

Revenue maximization maximizes as much revenue as possible for that time period while profit maximization tries to maximize the overall revenue minus cost (aka profit) for the time period. In the long run, profit maximization is the best strategy. But if you are a firm that has a lot of short terms debt, you need a lot of money now to pay it off. So revenue maximization is the solution. Increasing revenue is a good goal for gaining business and new clients and not focusing right now on profits. Most profit maximization requires time, something most companies cannot afford. Another reason is if it increases costs.


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