At this optimal activity level, price, total revenue, and the maximum total profit can be calculated as
P = $7,500 - $3.75Q = $7,500 - $3.75(600) = $5,250 per unit TR = $7,500Q - $3.75Q2
= $7,500(600) - $3.75(6002) = $3,150,000 n = TR - TC
= $7,500Q - $3.75Q2 - $1,012,500 - $1,500Q - $1.25Q2 = -$5Q2 + $6,000Q - $1,012,500 = -$5(6002) + $6,000(600) - $1,012,500 = $787,500
To maximize short-run profits, Storrs should expand from its current level of 400 units to 600 units per month. Any deviation from an output of 600 units and price of $5,250 per unit would lower Storrs' short-run profits.
Activity level that generates the highest revenue, MR = 0
Although marginal analysis is commonly employed to find the profit-maximizing activity level, managers can use the technique to achieve a variety of operating objectives. For example, consider the possibility that a company such as Storrs might wish to deviate from the short-run profit-maximizing activity level in order to achieve certain long-run objectives. Suppose Storrs fears that short-run profits as high as $787,500 per month (or 25 percent of sales) would provide a powerful enticement for new competitors.
To limit an increase in current and future competition, Storrs may decide to lower prices to rapidly penetrate the market and preclude entry by new rivals. For example, Storrs might wish to adopt a short-run operating philosophy of revenue maximization as part of a long-run value maximization strategy. In this instance, Storrs' short-run operating philosophy would be to set MR = 0, which would result in the following activity level:
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