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Profit Maximization

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The Stock Corporation makes two products, paper and cardboard.
The relationship between p, the firm's annual profit (in thousands of dollars) and its output of each good is {see attachment}, where Q1 is the firm's annual output of paper (in tons) and Q2 is the firm's annual output of cardboard (in tons).

a) Find the profit maximizing production levels for paper and cardboard.

b) If the local government imposes a tax of $5,000 per year on the firm, will this alter your answer to part a? Explain.

c) Suppose the local government imposes a 1% tax on profits. Will this alter your production levels of part a? Show.

d) Compare the two tax structures and comment on how the lump sum versus the proportional profit tax affects the allocation of resources.

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Solution Preview

How to setup problem for profit maximizing Production

a) p = -50 + 40Q1 + 30Q2 - 5Q1^2 - 4Q2^2 - 3Q1Q2

Take partial derivatives of p with respect to Q1 and Q2 and equate them to zero to get the profit maximizing levels.

dp/dQ1 = 40 ...

Solution Summary

The solution explains the concept of profit maximization pretty well. It uses the data given in the question to first calculate the profit maximization production levels. Then it evaluates the impact of additional taxes on the profit maximizing levels. Based on this analysis the solution comes to a conclusion related to profit maximization levels and the tax structure.

See Also This Related BrainMass Solution

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?


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

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