The group has come back to you for help on a pricing strategy. Since the coffee

Question

The group has come back to you for help on a pricing strategy. Since the coffee shop will be new, and receive a large amount of public attention, you decide to treat it as a Mon opoly for the first few months. The following equations describe the cost of production and the estimated demand to fill Travel Mugs : Demand: Price = 26 - Q Marginal Revenue : MR = 26 – 2Q Marginal Cost : MC = 2 + 2Q Total Cost Function : TC = 30 + 2Q + Q 2 How many Travel Mugs should be produced in order to Profit Maximize? What is the price each should be sold for? What is the Total Revenue earned wi th this number of sales? What is the profit you expect them to earn at this quantity?

Explanation / Answer

for profit max quantity

we set MR equal to MC

MR=MC

MR = 26 – 2Q Marginal Cost : MC = 2 + 2Q

26 – 2Q = 2 + 2Q

4Q = 24

Q = 6 units should be produced in order to Profit Maximize

P = 26-Q = 26-6 = $20

TR = P*Q = 20*6 = $120

TC = 30+2*6+6^2 = 78

Profits = TR-TC = 120-78 = 42

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