Question

Assume the production of cell phones requires labor and capital. Currently, the MRP for the last unit of labor is $20 and the MRP of the last unit of capital is $300. If the price of labor is $50 and the price of capital is $200, what should this do to the quantity of labor and the quantity of capital to maximize profit?

Answer 1

Lower the Price of the product to increase the profit from excessive sales. This way of increasing sales can be understood from the follwing example:

Current Profit per unit= $300 Market retail price - $50 Labor Cost - $200 Capital cost

Current Profit per unit = $50 per unit

At current selling price, our sales for the month are 2000 units of cell phones.

So our total profit is:

Total Profit= $50 Profit per unit * 2000 total units=$100,000

So if we decrease the price from $300 per unit to $290 per unit, which will reduce the profit per unit to $40 per unit and our sales increases to 3000 units of cell phones.

Now

Total Profit= $40 Profit per unit * 3000 total units sold=$120,000

So we can say reducing the selling price (or reducing the cost of labour and capital which also increase the profit per unit) will increase the demand and profit as well.