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    Calculating profit-maximizing price and output

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    Coke
    PL=$40-$0.0005QL
    MRL= dTRL/ dQL =$40-$0.001QL

    Pepsi
    PT=$50-$0.0004QT
    MRT=dTRT/dQT = $50 - $0.0008QT

    Average variable costs for labor and materials are constant at $20 per unit.

    1. Calculate the profit-maximizing price, output, and total profit contribution levels.
    2. Calculate point price elasticities of demand for each customer product at the activity levels identified in part A.

    © BrainMass Inc. brainmass.com October 10, 2019, 12:19 am ad1c9bdddf
    https://brainmass.com/economics/price-levels/calculating-profit-maximizing-price-output-287147

    Solution Preview

    1. Calculate the profit-maximizing price, output, and total profit contribution levels.

    Coke
    Marginal Cost=Constant variable cost per unit=$20
    Marginal Revenue=MRL=$40-$0.001QL

    A firm sets its output level such that Marginal Cost is equal to marginal revenue to maximize its profits.

    Put Marginal Cost=Marginal Revenue
    20=40-0.001Q
    0.001Q=40-20=20
    Q=20/.001=20000 units

    Price=PL=40-0.0005*20000=$30
    Total ...

    Solution Summary

    The solution describes the steps to calculate profit-maximizing price, output, total profit contribution levels and associated price elasticity of demand.

    $2.19