Page 325 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes Self Assessment

State whether the following statements are True/False:
7. The sales maximization firm of Baumol is more real than profit maximization firm.
8. Neo-classic profit maximization theory indicates that the production does not affect by fixed cost in
short run.

9. Baumol has described that the sales maximization firm can prevent from useful export and import
by producing multiproduct.
10. According to Baumol, the sale maximization firm will use the difference between the highest level
and the lowest level of profit for increasing its revenue.
Model with Multiproducts—Baumol has described that the sales maximization firm can be prevented
from useful export and import by producing multiproducts. It is shown in Fig. 19.8 where product X
is on horizontal axis and product Y is on vertical axis. PP curve indicates all combinations of X and
1
Y which can be produced by a fixed expenditure or total cost. Curves R , R and R are equal which
1 2 3
give equal revenue by all combinations of product X and Y. PP and R curves touch point T which is
1
2
profit maximization point. It is revenue maximization point which is situated in highest curve R which
3
matches the expenditure given by PP . Thus, both firms get same result when they use similar inputs in
1
equal quantity and fixed in similar way.
According to Baumol, the sales maximization firm will use the difference between the highest level and the
lowest level of profit for increasing its revenue. He says this difference as ‘rejected fund of profit’. “So every
time the firm increases the production for increasing its total revenue, then the firm need to use the rejected
fund of profit. This rejected fund of profit should distributed in various inputs, markets, inwards etc. that
the monetary profit will high. This relationship indicates that sales-maximization of the firm to break even in
relatively inputs and issues should avoid touching, whatever the level of total expenditure and total revenue.

Fig. 19.8

P

Goods Y T R 3

R
2
R
1
O P
1
Goods X

Implications or Superiority of the Model

There are some implications of Baumol’s sales maximization model which makes greater than the profit
maximization model of firm.
1. The sales maximization firm gets preference to sale rather than profit. Since it maximizes its revenue
when its MR is zero, so it takes low price than profit maximization firm.

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