Marginal Analysis of Toothpaste
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Details: The presentation to the Board went extremely well, and you made some clear points about the need to expand in the U.S. and abroad.
One question that arose during the meeting was about how the firm's profitability in their toothpaste division would be impacted by the expansion. The Board asked you to assess the profit potential using marginal analysis.
It is assumed that the toothpaste market is perfectly competitive and the current price of a case of toothpaste is $42.00. CPI has estimated its marginal cost function to bas follows: MC=.006Q.
The Board would like to know how many cases of toothpaste should be produced in order to maximize profits.
1.What would happen if CPI decided to raise prices unilaterally in this toothpaste market?
2.What would happen to the profit maximizing level of output if the market price suddenly rose to $54 per case? Explain why the output level changes.
3.Could CPI benefit by advertising in this perfectly competitive market?
4.If CPI was somehow able to monopolize the market what would happen to the price of toothpaste, would it rise or fall? What would happen to the profits CPI makes via their toothpaste division?
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Solution Summary
This posting does a marginal analysis of the toothpaste division and presents it to the board. In addition, the posting discusses different price demand scenarios.
Solution Preview
Memorandum to the Board of Directors,
Sirs,
Currently the market is perfectly competitive and he current price of one case of toothpaste is $42.00. As the CPI has estimated its marginal cost function to be MC = .006 Q, then our problem is to find the quantity. To maximize our profits the marginal cost must be equal to marginal revenue. However, since the marginal revenue in a perfectly competitive market is equal to the price. We have 42.00 = .006 Q. In other words Q is 7000. So, our company should currently produce 7000 cases of toothpaste to maximize its profit. If CPI decided to raise prices unilaterally in this toothpaste market, CPI would lose its entire demand to competitors. The reason is that under conditions of perfect competition no single producer or consumer can influence prices. In perfect competition there are several small producers and consumers, there is homogeneity of goods, there is perfect information, there is equal access to production techniques and independent buyers and seller act independently. ...
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