Share
Explore BrainMass

Calculating optimal price and output combination

The Steel Supply Corporation is an importer and distributor of Taiwanese-made, 96 piece hand-tool sets (screw drivers, wrenches, and the like). The U.S. Commerce Department recently informed the company that it will be subject to a new 25% tariff on the import cost of fabricated steel. The company is concerned that the tariff will slow its sales growth, given the highly competitive nature of the hand-tool market. Relevant market demand and marginal revenue relations are:

P= $80-$0.0001Q

MR= dTR/dQ =$80-$0.0002Q

The company's marginal cost equals import costs of $32 per unit, plus $8 to cover transportation, insurance, and related selling expenses. In addition to these costs, the company's fixed costs, including a normal rate of return, come to $2,500,000 per year on this product.

A. Calculate the optimal price/output combination and economic profits prior to imposition of the tariff.
B. Calculate the optimal price/output combination and economic profits after imposition of the tariff.
C. Compare your answers to parts A and B. Who pays the economic burden of the import tariff?

Solution Preview

A. Calculate the optimal price/output combination and economic profits prior to imposition of the tariff.

Marginal Cost, MC=Import costs+ other expanses=32+8=$40
MR =$80- $0.0002Q

Firm will maximize its profits by setting its output level such that MR=MC. So, put MR=MC

80-0.0002Q=40
0.0002Q=40
Q=40/.0002 =200000 units
P=80-0.0001*200000=$60

Total Revenue=TR=P*Q=60*200000=$12,000,000

Fixed cost=$2,500,000
Variable Costs=40*200000=$8,000,000
Total Cost, TC=Fixed Cost+ Variable ...

Solution Summary

Solution describes the steps to calculate optimal price, output and associated profit with and without imposition of tariff.

$2.19