Question

Last week you sold 8 units at a price of $5.57. This week you sold 16 units at a price of $4.26. If your marginal cost is $2, what price should you charge next week to maximize profit? (ALL EXACT NO ROUNDING)

Answer 1

Profit maximizing condition : MR=MC.

Marginal cost= $2

Marginal revenue = (Change in TR/Change in Q)
When P= $5.57 , Q= 8 units , TR= (5.57)(8)= $44.56

When P=$4.26, Q=16 units , TR= (4.26)(16)=$68.16

Next week ,he will produce = (16+8)= 24 units .

We know that at profit maximizing condition : Marginal revenue = (Change in TR/Change in Q) = MC

(Change in TR/ (24-16)]= 2

Change in TR= (2)(8)

Change in TR= $16

This means that when Q= 24 units , TR= $(68.16+16)= $84.16

TR=(P)(Q)

Because Q= 24 and TR= 84.16

P= 84.16/24 = $3.507

Hence, he should charge $3.507 next week to maximize profits.