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profit maximization

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Suppose a firm in an oligopolistic industry faces the following demand curve:

P = 4,900 - 2 Q for Q < 10,000
P = 20,000 - 0.6 Q for Q > 10,000

Suppose further its Cost function is as follows:

TC = 1,000 + 100Q +.5 Q2

a. What price do you suppose they will charge in the short run?
b. What do you suppose will happen in the long-run?

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Solution Preview

For profit maximization, we set MC=MR
MC=dTC/dQ=100+.5*2Q=100+Q

MR = dTR/dQ
TR=P*Q
So we have TR=4900Q-2Q^2 for Q<10000
and TR = 20000Q-0.6Q^2 for Q>10000

MR= 4900-4Q for Q<10000 and MR=20000-1.2Q for Q>10000

Now let us assume that Q<10,000 then equating MC=MR, we ...

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This posting determines profit maximization.

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Caledonia Products Case: Differences between goals of profit maximization and maximization of shareholder wealth; risk-return trade-off

Please see attached file.

The final stage in the interview process for an assistant financial analyst at Caledonia Products involves a test of your understanding of basic financial concepts and of the corporate tax code. You are given the following memorandum and asked to respond to the questions. Whether you are offered a position at Caledonia will depend on the accuracy of your response.

To: Applicants for the position of Financial Analyst
From: Mr. V. Morrison, CEO, Caledonia Products

Re: A test of your understanding f basic financial concepts and of the corporate tax code

Please respond to the following questions:

1. What are the differences between the goals of profit maximization and the maximization of shareholder wealth? Which goal do you think is more appropriate?
2. What does the risk-return trade-off mean?
3. Why are we interested in the cash flows rather than accounting profits in determining the value of an asset?
4. What is an efficient market and what are the implications of efficient markets for us?
5. What is the cause of the agency problem and how do we try to solve it?

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Book title: Foundations of Finance: Logic and Practice of Financial Management (6th Edition)
Author: Keown, Martin, Petty, and Scott

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