Profit Maximisation

June 08 Q4 is called "The Childrens Toy Company (CTC)".

Not sure what question you are referring to.

sorry its question June 2009 no 4, i am unable to calculate the profit maximisation and i fail to understand the formulae use in the BPP exam kit to arrive at the answer. grateful if you could explain in detail how to calculate the profit maximisation.thanks

This is a pricing question and the rule for profit maximisation is to find where marginal cost (MC) = marginal revenue (MR).

Using a profit-maximising algebraic approach where P = a – bQ [this is the standard starting point linking quantity of rooms sold and the price, P]

Then 400 = P – 0•25 x 1,440

Where a = 10/40 = 0•25 (a change of 40 people for a change of price of $10) and double occupancy = 75% x 2,400 = 1,800 x 80% = 1,440

Hence P = 400 + (0•25 x 1,440) = $760

Therefore P = 760 – 0•25Q

Total revenue = P x Q, so

TR = 760Q – 0•25Q2

MR = 760 – 0•5Q [MR = marginal revenue; it seems to me that this step, from TR to MR is beyond your syllabus now, so Don’t worry about it]

MC = 200 (2 persons x $100).

In order to achieve maximum profit then MR = MC

Therefore 760 – 0•5Q = 200
And Q = (760 – 200)/0•5 = 1,120 units

Therefore the selling price per double room at the profit-maximising level (P):
= 760 – 0•25 x 1,120
= 760 – 280
= $480

THANK YOU SO MUCH.It is clear now. i dont need to worry about it then if it is not in syllabus

hey my name is mishaal.i have a small question about this profit max approach p = a - bx..
.i know p is the price at which profit will be maximised .x is quantity demanded..b is change in price with change in demand..i have doubt about 'a' can u plz tell???

@samiirah, woah, woah, don't assume that!

@ mishaaljavaid, a would be the price at which nothing would be demanded (because it is so high).