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To calculate the Max Profit and Max Revenue we need to know the demand level that customers would be interested in.
So the quantity demanded would be calculated using the Marginal Revenue equation [MR = a – 2bQ]
Optimal Selling Price is achieved by charging maximum selling price at the lower demand level to get the maximum profit. Since we are charging maximum selling price then the demand level would not be at maximum because fewer customers would not be interested in buying at high prices.
[ Max Profit is where the Marginal Revenue = Marginal Cost (MR = MC) ]
Optimal Revenue is achieved by selling maximum demand at the lower selling price to get the maximum revenue. Since we are not charging high selling price then the demand level would be at maximum because more customers would be interested in buying at lower prices.
[ Max Revenue is where the Marginal Revenue = Marginal Cost (MR = MC) ]
The quantity demanded would be lower in optimal selling profit as compared to the quantity demanded in optimal revenue because of lower selling price but higher demand.
We then apply the price demand equation to derive the selling price where we have maximum profit or in case of optimal revenue we have maximum revenue.
Is that all correct?
No.
Maximum profit is correct in that it is where the marginal revenue = the marginal cost.
However maximum revenue is where the marginal revenue = 0 (zero).
Look again at the revenue graph that I explain in my free lectures 🙂
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Where am I wrong!? I’ve seen your lecture again & again but still have problem
I read in the notes about optimal selling price but could find anything on optimal revenue such as:
Optimal Selling Price is to maximize profit and we can get that by charging maximum selling price but our demand would be affected by the higher selling prices and fewer customers would be willing to buy at expensive prices
Optimal Revenue is to achieve maximum revenue and we can get that by increasing our demand which can be done by charging lower selling prices and more customers would be attracted to buy at cheap prices.
I have seen that the quantity demanded is always higher when calculating for maximizing revenue and lower when calculating for maximizing profit and this is due to the lower price being charged in the first instance and higher price being charged in the second instance.
Isn’t this true and please tell me where I am wrong this time!
You are right this time. Where you were wrong last time was that you typed that maximum revenue was where MR = MC. That is what gives the maximum profit, not maximum revenue.
If you look at the graph of the revenue, then the maximum is when the revenue is at the highest point.
At the highest point the slope/gradient of the graph is zero. The marginal revenue is giving the slope/gradient at any point, and so the maximum revenue is when MR = 0.
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