$7,500 1,000 units
-$5(1,0002) + $6,000(1,000) - $1,012,500 = -$12,500 (A loss)
Notice that revenue maximization involves a consideration of revenue or "demand-side" influences only. In this instance, the revenue-maximizing activity occurs when a loss of $12,500 per month is incurred. In other instances, profits may be high or low at the point of revenue maximization. Unlike profit maximization, cost relations are not considered at all. Relative to profit maximization, revenue maximization increases both unit sales and total revenue but substantially decreases short-run profitability. These effects are typical and a direct result of the lower prices that accompany a revenue maximization strategy. Because revenue maximization involves setting MR = 0, whereas profit maximization involves setting MR = MC, the two strategies will only lead to identical activity levels in the unlikely event that MC = 0. Although marginal cost sometimes equals zero when services are provided, such as allowing a few more fans to watch a scarcely attended baseball game, such instances are rare. Most goods and services involve at least some variable production and distribution costs, and hence marginal costs typically will be positive. Thus, revenue maximization typically involves moving down along the demand and marginal revenue curves to lower prices and greater unit sales levels than would be indicated for profit maximization. Of course, for this strategy to be optimal, the longrun benefits derived from greater market penetration and scale advantages must be sufficient to overcome the short-run disadvantage of lost profits.
average cost minimization
Activity level that generates the lowest average cost, MC = AC
Profit and revenue maximization may be the most common uses of marginal analysis, but other useful applications are also prevalent. Consider the implications of still another possible short-run strategy for Storrs. Suppose that instead of short-run profit or revenue maximization, the company decides on an intermediate strategy of expanding sales beyond the short-run profit-maximizing activity level but to a lesser extent than that suggested by revenue maximization. This might be appropriate if, for example, Storrs is unable to finance the very high rate of growth necessary for short-run revenue maximization. Given the specific nature of Storrs' total cost and profit relations, the company might decide on a short-run operating strategy of average cost minimization. To find this activity level, remember that average cost is falling when MC < AC, rising when MC > AC, and at a minimum when MC = AC. Therefore, the average cost minimizing activity level for Storrs is
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Since World War II, there has been a tremendous change in the makeup and direction of kid baseball, as it is called. Adults, showing an unprecedented interest in the activity, have initiated and developed programs in thousands of towns across the United States programs that providebr wholesome recreation for millions of youngsters and are often a source of pride and joy to the community in which they exist.