Hey Jack,

Hope you had a great summer. This semester is in full blast. I am having trouble with three problems in managerial econ. Do you or know of someone of help?

Thanks,

Stephen

Hey Stephen,

It is good to hear from you again. These profit maximization problems are all about marginal revenue and marginal cost. The higher the price you charge, the more revenue per sale, but fewer sales.

Maximizing revenue is one thing, but maximum revenue and minimum costs usually don’t happen together, so to get maximum profit we look for the maximum positive difference between total revenue and total costs.

In the three problems you sent, the first two have price changing with quantities – something that occurs in monopolistic conditions, not with competition. The uniqueness of the products allows for no perfect substitution in the market. The third problem includes competitive responses to pricing, but only requires a few calculations to specific questions.

I solved the first problem using an Excel spreadhsheet and charting the demand curve, revenue, costs, and profit.  The second problem is very similiar to the first, but I calculated the solution using the constant decline rate in the marginal revenue.

I hope these help you understand the relationship between price, quantity, revenue and costs. In general terms, to maximize profit, keep expanding production until marginal revenue from sales no longer exceeds marginal costs of production. 

Good studying,

Jack 

• Calculate Maximum Profit using marginal revenue and marginal cost: Night Timers
• Charting Maximimum Profit for demand curve: War Game Inc.
• Calculate Maximizing Profit and competition impact on Demand Curve: The Juice Shop