# output, marginal cost, average cost, price, and profit at the average-cost minimizing activity level

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Profit Maximization: Equations. Rochester Instruments, Inc., operates in the highly

competitive electronics industry. Prices for its RII-X control switches are stable at $50 each.

This means that P = MR = $50 in this market. Engineering estimates indicate that relevant

total and marginal cost relations for the RII-X model are

TC = $78,000 + $18Q + $0.002Q2

MC = dTC/dQ = $18 + $0.004Q

A. Calculate the output level that will maximize RII-X profit.

B. Calculate this maximum profit.

P2.10

Average Cost Minimization. Giant Screen TV, Inc., is a San Diego-based importer and dis-J

tributor of 60-inch screen, high-resolution televisions for individual and commercial customers.!

Revenue and cost relations are as follows:

TR = $1,800Q - $0.006Q2

MR = dTR/dQ = $1,800 - $0.012Q

TC = $12,100,000 + $800Q + $0.004Q2

MC = dTC/dQ = $800 + $0.008Q

A. Calculate output, marginal cost, average cost, price, and profit at the average-cost minimizing

activity level.

B. Calculate these values at the profit-maximizing activity level.

C. Compare and discuss your answers to parts A and B.

P3.1

PROBLEMS

Demand and Supply Curves. The following relations describe monthly demand and supply]

conditions in the metropolitan area for recyclable aluminum:

QD = 317,500 - 10,000P (Demand)

Qs = 2,500 + 7,500P (Supply)

where Q is quantity measured in pounds of scrap aluminum and P is price in cents.

Complete the following table:

Price Quantity Supplied Quantity Demanded Surplus (+) or Shortage (-)

(1) (2) (3) (4) = (2) - (3)

-------------------------------------------------------------------------------------------------------------------------

15 cents

16 "

17 "

18 "

19 "

20 "

P3.5 Demand Function. The Creative Publishing Company (CPC) is a coupon book publisher

with markets in several southeastern states. CPC coupon books are either sold directly to the

public, sold through religious and other charitable organizations, or given away as promotional

items. Operating experience during the past year suggests the following demand

function for CPC's coupon books:

Q = 5,000 - 4,OOOP + 0.02Pop + 0.5/ + 1.5A

where Q is quantity, P is price ($), Pop is population, I is disposable income per household ($),

and A is advertising expenditures ($).

A. Determine the demand faced by CPC in a typical market in which P = $10, Pop = 1,000,000

persons, I = $30,000, and A = $10,000.

B. Calculate the level of demand if CPC increases annual advertising expenditures from $10,000 to $15,000.

P3.8

Supply Curve Determination. Olympia Natural Resources, Inc., and Yakima Lumber, Ltd

supply cut logs (raw lumber) to lumber and paper mills located in the Cascade Mountain

region in the state of Washington. Each company has a different marginal cost of production

depending on its own cost of landowner access, labor and other cutting costs, the distance cut

logs must be shipped, and so on. The marginal cost of producing one unit of output, measured

as 1,000 board feet of lumber (where 1 board foot is 1 square foot of lumber, 1-inch thick), is

MC0 = $350 + $0.00005Q0 (Olympia)

MCy = $150 + $0.0002QY (Yakima)

The wholesale market for cut logs is vigorously price competitive, and neither firm is able tol

charge a premium for its products. Thus, P = MR in this market.

A. Determine the supply curve for each firm. Express price as a function of quantity and

quantity as a function of price. (Hint: Set P = MR = MC to find each firm's supply curve.)

B. Calculate the quantity supplied by each firm at prices of $325, $350, and $375. What is the

minimum price necessary for each individual firm to supply output?

C. Assuming these two firms make up the entire industry in the local area, determine the industry supply curve when P < $350.

D. Determine the industry supply curve when P > $350. To check your answer, calculate quantity at an industry price of $375 and compare your result with part B.

P3.10

Market Equilibrium. Eye-de-ho Potatoes is a product of the Coeur d'Alene Growers'

Association. Producers in the area are able to switch back and forth between potato and

wheat production depending on market conditions. Similarly, consumers tend to regard

potatoes and wheat (bread and bakery products) as substitutes. As a result, the demand and

supply of Eye-de-ho Potatoes are highly sensitive to changes in both potato and wheat prices.

Demand and supply functions for Eye-de-ho Potatoes are as follows:

QD = -1,450 - 25P + 12.5PW + 0.2Y (Demand)

Qs = -100 + 75P - 25PW - 12.5PL + 10R (Supply)

where P is the average wholesale price of Eye-de-ho Potatoes ($ per bushel), Pw is the average

wholesale price of wheat ($ per bushel), Y is income (GNP in $ billions), PL is the average price

of unskilled labor ($ per hour), and R is the average annual rainfall (in inches). Both QD and

Qs are in millions of bushels of potatoes.

A. When quantity is expressed ,as a function of price, what are the Eye-de-ho Potatoes demand

and supply curves if P = $2, Pw = $4, Y = $7,500 billion, PL = $8, and R = 20 inches?

B. Calculate the surplus or shortage of Eye-de-ho Potatoes when P = $1.50, $2, and $2.50.

C. Calculate the market equilibrium price/output combination.

#### Solution Summary

The revenues at profit maximization point is determined.