Practical Applications of Marginal Analysis
IKT434 Topics in Economics
Managerial Economics
Practical Applications of Marginal Analysis The most common use of marginal analysis is to find the profit maximizing activity level. To show how this is done, consider the following case of Storrs Manufacturing Company.
Case Study: Storrs manufacturing company Storrs manufacturing company is located in Ankara. The company has developed and test-marketed the “Golden-Bear Golf Cart”, a newly and highly energy efficient golf cart. The product is unique and preliminary indications are that Storss can obtain a substantial share of the national market if it acts quickly to expand production from its current level of 400 units per month. Data from independent marketing consultants retained by Storrs indicate the following monthly demand, total revenue and marginal revenue relations:
P = 7500 − 3 . 75 Q
Demand Total revenue Marginal revenue
TR = 7500 Q − 3 .75 Q 2
MR = 7500 − 7 . 5 Q
Where p is price and Q is output.
Storrs accounting department has estimated monthly total cost and marginal cost relations as follows:
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IKT434 Topics in Economics
TC = 1 .012 .500 + 1500 Q + 1, 25 Q 2
MC = 1500 + 2 , 5 Q
Given these data, a.) What is the profit maximizing optimal production level of this company? b) What is the total profit of this firm at this activity level?
10
IKT434 Topics in Economics
1. Profit Maximisation: We know that the activity level maximising profit is where MR=MC. If; MR = MC
7500 − 7 ,5Q = 1500 + 2 ,5Q
10Q = 6000 level) Q = 600 units (profit maximising output
P = 7500 – 3,75 Q P = 7500 – 3,75 * 600 P = 5250 TL
Π = TR − TC
Π = 7500Q − 3,75Q 2 − 1.012.500 − 1500Q − 1,25Q 2
Π = 787.500 TL
2. Revenue Maximisation: Firms do not always aims profit maximisation. Especially, the sectors where profit margins are quite high always attract the new firms. One way to prevent the entrance of new firms into such markets is to target short run revenue
Managerial Economics
Practical Applications of Marginal Analysis The most common use of marginal analysis is to find the profit maximizing activity level. To show how this is done, consider the following case of Storrs Manufacturing Company.
Case Study: Storrs manufacturing company Storrs manufacturing company is located in Ankara. The company has developed and test-marketed the “Golden-Bear Golf Cart”, a newly and highly energy efficient golf cart. The product is unique and preliminary indications are that Storss can obtain a substantial share of the national market if it acts quickly to expand production from its current level of 400 units per month. Data from independent marketing consultants retained by Storrs indicate the following monthly demand, total revenue and marginal revenue relations:
P = 7500 − 3 . 75 Q
Demand Total revenue Marginal revenue
TR = 7500 Q − 3 .75 Q 2
MR = 7500 − 7 . 5 Q
Where p is price and Q is output.
Storrs accounting department has estimated monthly total cost and marginal cost relations as follows:
9
IKT434 Topics in Economics
TC = 1 .012 .500 + 1500 Q + 1, 25 Q 2
MC = 1500 + 2 , 5 Q
Given these data, a.) What is the profit maximizing optimal production level of this company? b) What is the total profit of this firm at this activity level?
10
IKT434 Topics in Economics
1. Profit Maximisation: We know that the activity level maximising profit is where MR=MC. If; MR = MC
7500 − 7 ,5Q = 1500 + 2 ,5Q
10Q = 6000 level) Q = 600 units (profit maximising output
P = 7500 – 3,75 Q P = 7500 – 3,75 * 600 P = 5250 TL
Π = TR − TC
Π = 7500Q − 3,75Q 2 − 1.012.500 − 1500Q − 1,25Q 2
Π = 787.500 TL
2. Revenue Maximisation: Firms do not always aims profit maximisation. Especially, the sectors where profit margins are quite high always attract the new firms. One way to prevent the entrance of new firms into such markets is to target short run revenue