profit maximization price

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November 30, 2014 at 10:31 am #214683
alawi sayed
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Hi,
There is a q in mock exam for profit maximization price :

SP is $ 200 where the demand is 100,000 units
if the price change by $ 30 the demand change by 10000 units

FC is $ 60000 VC is $ 8 per unit

and asking the price where the profit is maximize ,

Thanks,

Alawi
November 30, 2014 at 3:14 pm #214754
John Moffat
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In the price demand equation, b = 30/10000 = 0.003
a = 200 + (0.003 x 100,000) = 500.

So the equation for MR = 500 – 0.006Q

MC = marginal/variable cost = 8

For maximum profit, MR = MC

So 500 – 0.006Q = 8
0.006Q = 492
Q = 492/0.006 = 82,000

Putting this in the price demand equation gives:
P = 500 – (0.003 x 82000) = $254

(Hope that helps, if not then do watch the free lecture on pricing)
November 30, 2014 at 5:18 pm #214804
alawi sayed
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Thank you so much…..

but I would like to know why we maximize profit when we have MC=MR ,

Thanks,
December 1, 2014 at 8:11 am #214965
John Moffat
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You will have to watch the free lecture to understand why profit is maximised when MR = MC

I cannot type out the whole lecture on here.
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