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Assessing Profit Potential Using Marginal Analysis

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 base follows: MC =.006Q.

1. The Board would like to know how many cases of toothpaste should be produced in order to maximize profits.
2. What would happen if CPI decided to raise prices unilaterally in this toothpaste market?
3. 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.
4. Could CPI benefit by advertising in this perfectly competitive market?
5. 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?

Solution Preview

1. Because the toothpaste market is perfectly competitive, we know that its profit max. rule is MC = P

Since P = 42, we have MC = 0.006Q = 42 = P, solve for Q and get Q = 7000. SO 7000 cases should be produced.

2. CPI will not be able to sell anything. One of the properties about perfect competition is that they face an perfectly elastic demand curve. This means that at the present price level, ...

Solution Summary

The solution discusses the effects various price and advertising alterations of a toothpaste company in a perfectly competitive market would have on CPI, as a way of assessing profit potential. 290 words.

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