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    Financial Management - CPI

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    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 be as follows: MC=.006Q.

    The Board would like to know how many cases of toothpaste should be produced in order to maximize profits.

    What would happen if CPI decided to raise prices unilaterally in this toothpaste market?

    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.

    Could CPI benefit by advertising in this perfectly competitive market?

    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?

    This calls for you to determine what would happen if CPI unilaterally raised prices (this is different than the market price; the price all firms in the market charge)

    Keep in mind we are assuming the market is hypothetically perfectly competitive, although in reality, we know it's not. What does that mean for pricing? Who sets the prices?

    Then assume CPI has a monopoly on the market, again hypothetically, in reality we know it's not.

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    Solution Preview

    The response addresses the queries posted in 1104 words with references.

    //Market structure plays a vital role for companies in taking a decision about price changes and even ensuring the profitability of the company. CPI toothpaste division has to ensure and assess its profitability in the market structure in which it operates before making an expansion. Here we will discuss and analyze the profitability of company under perfectly competitive and monopoly market structures through marginal analysis. But draft and start the memo, like this: //

    Memorandum

    To: Board of Directors of CPI

    Date: December 2, 2009

    From: Employee of the CPI

    Sub: Assessment of profit potential through marginal analysis

    Companies before going in for an expansion project should assess the profitability that will be provided by the project. Companies need to look in which market structure they are operating and then, should analyze the profitability level.

    Perfectly Competitive Market

    In a perfectly competitive market, in which CPI operates the profits, can be maximized at the point where price of the toothpaste or marginal revenue from the toothpaste equals the marginal cost for the product (Mankiw & Taylor, 2006). Thus, CPI can maximize its profits under perfectly competitive market in such a situation:

    P= MR=MC

    $42 = .006 Q

    Thus, if is found that profits can be maximized at the output level of 7,000.

    //Above, we discussed about the profit maximization level of CPI under perfect competitive market structure. Now we will discuss what are the effects if CPI increases the price of product and even the role that advertisement can play in such a ...

    $2.19