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Calculating profit maximizing price/output combination

The Telemarketing Louisianan Company generates leads for a major credit card company using over-the-phone solicitations. Each lead generated brings TLC $10 in fees, and these fees are stable given the competitive nature of the telemarketing business. TLC's relies upon independent contractors (sales associates) who work on a commission-only basis. Weekly total cost (TC) and marginal cost (MC) relations are:

TC = $50,000 + $0.0005Q^2

MC = DTC/ DQ = $0.001Q

where Q is thousands of refinancing applications processed.

Suppose the US Department of Labor recently ruled that TLC's sales associates must be considered employees entitled to benefits under the Employee Retirement Income Security Act (ERISA). As a result, TLC's marginal cost of doing business will rise by $1 per unit. TLC's fixed expenses, which include a required return on investment, will be unaffected.

A. Calculate TLC's profit-maximizing price/output combination and economic profits before meeting DOL guidelines.

B. Calculate the profit-maximizing price/output combination and economic profits after TLC has met DOL guidelines.

C. Compare your answers to parts A and B. Who pays the economic burden of meeting DOL guidelines?

Solution Preview

A. Calculate TLC's profit-maximizing price/output combination and economic profits before meeting DOL guidelines.

MC = dTC/ dQ =0.001Q
Marginal Revenue=MR=$10
For profit maximization, put MR=MC
10=0.001Q
Q=10/0.001=10000

Revenue per lead=$10
Total ...

Solution Summary

Solution describes the steps to calculate profit maximizing price/output combination in the given cases.

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