Profit Maximization - Case in Which Maximizing Revenue Is Equivalent

Case in Which Maximizing Revenue Is Equivalent

In some cases a firm's demand and cost conditions are such that marginal profits are greater than zero for all levels of production up to a certain maximum. In this case marginal profit plunges to zero immediately after that maximum is reached; hence the Mπ = 0 rule implies that output should be produced at the maximum level, which also happens to be the level that maximizes revenue. In other words the profit maximizing quantity and price can be determined by setting marginal revenue equal to zero, which occurs at the maximal level of output. Marginal revenue equals zero when the total revenue curve has reached its maximum value. An example would be a scheduled airline flight. The marginal costs of flying one more passenger on the flight are negligible until all the seats are filled. The airline would maximize profit by filling all the seats. The airline would determine the conditions by maximizing revenues.