How does a firm maximise revenue (linear revenue curves)?

Total revenue is maximised where the downward sloping marginal revenue curve cuts the x-axis. This makes sense when we realise that 'marginal' means 'of an additional unit'. So, total revenue is maximised when the additional revenue from another unit is 0. In this case, total revenue is unaffected by the decision to produce an additional unit. At low output levels - when marginal revenue is positive (above x-axis) - the additional revenue from another unit is positive, meaning increasing output increases total revenue. However, when marginal revenue becomes negative (below x-axis), the additional revenue from producing another unit is negative. This means total revenue is actually LOWER than if the firm had produced less output. Revenue is maximised when MR cuts the x-axis as the additional revenue of the next unit is 0 - total revenue is unaffected by adding another unit. N.b. This all relates to revenue (earnings) and is separate from profit maximisation, which requires an understanding of cost curves.

Answered by Oliver B. Economics tutor

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