Question
4. Cal's son is studying in the MBA program at UMUC. He tells his father that profit maximization occurs when marginal cost (MC) = marginal
4. Cal's son is studying in the MBA program at UMUC. He tells his father that profit maximization occurs when marginal cost (MC) = marginal revenue (MR). Cal asks you for a definition of each. You tell Cal that his marginal cost is the same as his variable cost, or $2.661 per gallon.
Marginal revenue is more difficult. Marginal revenue is the increase in total revenue from selling one more unit or gallon. You decide that if a price change of 1 cent causes demand to change by 400 gallons, then a price change of 1 cent divided by 400 gallons is the price change to sell one more gallon.
Given that you know the price and quantity of gallons sold so far, and that Cal's cost is $2.661 per gallon, complete the table to the right:
| Profit Maximization | |||||
| Gallons sold per day | Price | Revenue (price x gallons) | Material Cost (cost per unit x volume) | Fixed cost per day | Profit (revenue - all costs) |
| 3,200 | $2.779 | $8,892.80 | $8,515.20 | $50 | $327.60 |
| 3,600 | $2.769 | $9,968.40 | $9,579.60 | $50 | $338.80 |
| 4,000 | $2.759 | $11,036.00 | $10,644.00 | $50 | $342.00 |
| 4,400 | $2.749 | $12,095.60 | $11,708.40 | $50 | $337.20 |
5. Once you calculate total profit, what is the profit maximizing price?
6. Next calculate marginal revenue, knowing that it is the difference between the revenue at the price shown and the revenue at 1/400 of a cent less. Calculate 1/400 of a cent as well as the new price.
Complete the table to the right:
| Marginal Revenue | Marginal Cost | |||||||
| Gallons sold per day | Price | Revenue (price x gallons) | Marginal revenue | Cost per gallon | Material Cost | Fixed Cost | Total Cost | Marginal Cost |
| 3,200 | $2.779000 | $8,892.80 | $2.661 | $8,515.20 | $50.00 | $8,565.200 | ||
| 3201 | $2.778900 | $8,895.50 | $2.6900 | $2.661 | $8,517.860 | $50.00 | $8,567.860 | $2.6610 |
| 3600 | $2.769000 | $9,968.40 | $2.661 | $9,579.600 | $50.00 | $9,629.60 | ||
| 3601 | $2.768900 | $9,971.08 | $2.6700 | $2.661 | $9,582.260 | $50.00 | $9,632.26 | $2.6610 |
| 4,000 | $2.759000 | $11,036.00 | $2.661 | $10,644.000 | $50.00 | $10,694.00 | ||
| 4,001 | $2.758900 | $11,038.66 | $2.6600 | $2.661 | $10,646.661 | $50.00 | $10,696.66 | $2.6610 |
| 4400 | $2.749000 | $12,095.60 | $2.661 | $11,708.400 | $50.00 | $11,758.40 | ||
| 4401 | $2.748900 | $12,098.24 | $2.6400 | $2.661 | $11,711.061 | $50.00 | $11,761.06 | $2.6610 |
7. Does MC = MR at the maximum profit point?
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Investment Analysis And Portfolio Management
Authors: Frank K. Reilly, Peggy L. Hedges, Philip Chang, Keith C. Brown, Hedges Reilly Brown
1st Canadian Edition
0176500693, 978-0176500696
