Hook, Inc., is an international manufacturer of bulk antibiotics for the animal
ID: 1217891 • Letter: H
Question
Hook, Inc., is an international manufacturer of bulk antibiotics for the animal feed market. Dr. Mike Jones, head of marketing and research, seeks your advice on an appropriate pricing strategy for Pharmed Caplets, an antibiotic for sale to the veterinarian and feedlot-operator market. This product has been successfully launched during the past few months in a number of test markets, and reliable data are now available for the first time. The marketing and accounting departments have provided you with the following monthly total revenue and total cost information:
TR = $900Q - $0.1Q2
TC = $36,000 + $200Q + $0.4Q2
1) What is the revenue maximizing output and price? Why is this different from profit-maximizing output and price?
2) If the government places a ceiling at a price of $820 this is below profit maximizing price. Will the firm continue to produce at this price? If so, what output and price will they choose? Or will it shut down? Why?
Explanation / Answer
MR = dTR/dQ = 900 – 2*0.1Q
MC = dTC/dQ = 200 + 2*0.4Q
Profit max condition is MR=MC, so
900 – 2*0.1Q = 200 + 2*0.4Q
900 – 0.2Q = 200 + 0.8Q
Q = 700
TR = 900*700 – 0.1*(700)^(2) = 581,000
TR = P*Q, so
P = TR/Q = 830
VC = $200Q + $0.4Q2
AVC = 200 +0.4Q = 200+0.4*700 = 480
The price/output combination at which total profit is maximized is P = $830 and Q = 700 units.
At that point, MR = MC and total profit is maximized at $209,000.
The price/output combination at which average cost is minimized is P = $870 and Q = 300 units. At that point, MC = AC = $440
AVC at 700 units is 480, this is well below the price of 830 and 820 so the firm will continue to operate as they are able to cover its AVC at a price of 830 as well as 820 which is binding price.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.