Question

It was a bumper crop for hominy this year, and The Hominy Man hoped to set a price for a case that can maximize profit. The annual fixed cost for the hominy harvesting and other equipment is $200 and the variable cost per case is $20. The price (p) is related to demand (v) according to the following equation: v = 800 - 16p. To maximize the profit, the optimal price of a case should be_____. The maximized profit is_____.

Answer 1

optimal price = $35

Maximum profit = $3400

Explanation:

We are given;

The annual fixed cost for the hominy harvesting and other equipment = $200

The variable cost per case = $20

Since demand is given as v, thus total variable cost = 20v

Thus;

Overall total cost = fixed cost + total variable cost = 200 + 20v

We are given relationship between p and v as;

v = 800 - 16p

Making p the subject gives;

p = (800 - v)/16

Now, total revenue is given by;

Total Revenue = vp

Thus;

Total revenue = v[(800 - v)/16] = 50v - v²/16

Now, profit will be;

Profit(P) = Total revenue - total cost

P = (50v - v²/16) - (200 + 20v)

P = 50v - (v²/16) - 200 - 20v

P = 30v - (v²/16) - 200

Maximum profit will be at dP/dv = 0

Thus;

dP/dv = 30 - (v/8)

At dP/dv = 0

30 - (v/8) = 0

v/8 = 30

v = 30 × 8

v = 240

Optimal price will be gotten by putting 240 for v in the price equation which is p = (800 - v)/16.

Thus;

p = (800 - 240)/16

p = 560/16

p = $35

So, optimal price = $35

Maximum profit will be at v = 240.so let's plug in 240 for v into the profit equation.

Thus;

P = 30(240) - (240²/16) - 200

P = 3400

Maximum profit = $3400