Explore BrainMass

Explore BrainMass

    Detailed Profit Maximization Calculation With Variations

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    A firm uses a single plant with cost C=160+16Q+0.1Q^2 and faces the price equation P=96-0.4Q.
    A) Find the firm's profit-maximizing price and quantity. What is its profit?
    B) The firm's production manager claims that the firm's average cost of production is minimized at an output of 40 units. Furthermore, she claims that 40 units is the firm's profit=maximizing level of output. Explain whether these claims are correct.
    C) Could the firm increase its profit by using a second plant (with cost identical to the first) to product the output in part (a)? Explain.

    © BrainMass Inc. brainmass.com October 10, 2019, 3:23 am ad1c9bdddf

    Solution Preview

    The firm's profit-maximizing output (Q) is where Marginal Revenue (MR) = Marginal Cost (MC)

    Total Revenue (TR) = PQ
    TR = (96 - 0.4Q)Q
    TR = 96Q - 0.4Q^2

    MR is the derivative of TR
    MR = 96 - 2(0.4Q)
    MR = 96 - 0.8Q

    Total Cost (TC) = 160 + 16Q + 0.1Q^2

    MC is the derivative of TC
    MC = 16 + 2(0.1Q)
    MC = 16 + 0.2Q

    To maximize profit, let MR = MC
    96 - 0.8Q = 16 + ...

    Solution Summary

    A calculation of a firm's profit-maximizing price and output, followed by mathematical analysis of other possible production strategies.