A Level Economics AQA Practice Exam

What does revenue maximisation occur when?

1. Marginal cost equals marginal revenue

2. Marginal revenue is equal to zero

3. Total revenue exceeds total cost

4. Profit margins are at their highest

The correct answer is: Marginal revenue is equal to zero

Revenue maximisation occurs when marginal revenue is equal to zero. This is because, at this point, the firm has reached the highest possible total revenue for its output level. When marginal revenue is zero, it indicates that any additional unit sold does not increase total revenue, meaning the firm has maximised its income from sales at that specific quantity of output. In the context of revenue maximisation, if a firm were to produce and sell one more unit beyond this point, it would either see total revenue decline or remain unchanged, which contradicts the goal of maximising revenue. This concept is vital in understanding how firms respond to market dynamics and adjust their output to achieve maximum revenue. Other options may discuss profit conditions or cost relationships, but they do not specifically address the point at which revenue is maximised. Marginal cost equalling marginal revenue indicates profit maximisation rather than revenue maximisation, total revenue exceeding total cost pertains to profitability rather than revenue generation, and high profit margins relate to costs and pricing strategies rather than specifically to the production of revenue itself.