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What would it cost to produce these traps?

Mr. Mick Mouse has a trap company with fixed costs of $846, variable (i.e. operating) costs of $2 per trap and a demand curve of: traps=116-2(price). Since Mick does not understand economics, find the revenue and cost functions in terms of price for his business.

a) Describe the graph of these two functions over the price domain. Find the break-even point and the profit at the highest price possible. What does this relationship mean for his business?

b) Construct the profit function and list the key points or roots of the function. What happens to profit as Mick increases his price?

c) Using any method compute the maximum profit and the appropriate price to charge to achieve this value. What quantity of traps should he produce and what would it cost to produce these traps?

Solution Preview

Please see the attachment for complete answer along with calculations.

a) Let t be the price for one trap. C is the cost function. D is the demand function. R is the revenue function. P is the profit function. Break even point, t0, occurs when revenue and costs are equal.

For both graphs, C and R will be on the vertical axis and t will be on the horizontal axis. ...

Solution Summary

Help is given to compute the maximum profit and the appropriate price to charge to achieve this value. What quantity of traps should he produce and what would it cost to produce these traps?

$2.19