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Calculating output, price, total revenue and total profit

Restaurant Marketing Services, Inc., offers affinity card marketing and monitoring systems to fine dining establishments nationwide. Fixed costs are $600,000 per year. Sponsoring restaurants are paid $60 for each card sold, and card printing and distribution costs are $3 per card. This means that RMS's marginal costs are $63 per card. Based on recent sales experience, the estimated demand curve and marginal revenue relations for are:

P=$130-$0.000125Q

MR=dTR/dQ =$130-$0.00025Q

A.Calculate output, price, total revenue and total profit at the revenue-maximizing activity level.
B.Calculate output, price, total revenue and total profit at the profit-maximizing activity level.
C.Compare and discuss your answers to parts A and B.

Solution Preview

A. Calculate output, price, total revenue and total profit at the revenue-maximizing activity level.

Revenue will be maximized when MR=0
130-0.00025Q=0
Q=130/0.00025=520000

P=130-0.000125Q=130-0.000125*520000=$65

Fixed Cost=$600,000
Variable Cost per unit=$63
Total Variable Cost=63Q
Total Cost=Fixed Cost+ Total Variable Cost=600000+63Q

Let us calculate ...

Solution Summary

Solution describes the steps to calculate output, price, total revenue and total profit at both revenue maximizing and profit maximizing levels.

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