Dyna Rubber Inc. manufactures a high performance tire called the Sport 70. Fixed

Question

Dyna Rubber Inc. manufactures a high performance tire called the Sport 70. Fixed development costs for the current year are $600,000 per year. Marginal costs for manufacturing and distribution are $63 per tire. Based on recent sales experience, the estimated price for the Sport 70 is P = $130 - $.000125Q 1. Calculate the firms TR function 2. Calculate the firm’s TC function 3. Calculate the output, price total revenue and total profit at the revenue maximizing activity level 4. Calculate the output, price total revenue and total profit at the profit maximizing activity level

Explanation / Answer

Given: Fixed cost (FC) = $600,000, Marginal cost (MC) = $63, P = $130 - $.000125Q

1. Calculate the firms TR function

Total revenue (TR) = Price * Quantity

TR = ($130 - $.000125Q )*Q = $130Q - $.000125Q2

2. Calculate the firm’s TC function

TC = $600,000 + $63Q

3. Calculate the output, price total revenue and total profit at the revenue maximizing activity level

To maximize revenue, differentiate the TR function, put is equal to zero and find the value of Q

d(TR)/dQ = $130 - $0.00025Q = 0

so Q = 520000, P = 65, TR = P*Q = 33800000,

Total Profit = TR-TC = 33800000 - 38760000

4. Calculate the output, price total revenue and total profit at the profit maximizing activity level

profit maximizing activity level = MC = MR

130 - 0.00025Q = 63, so Q = 268000

P = 96.5, TR = 25862000, TC = 22884000 Profit = 2978000

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.