Micro Economics

Presto Products, Inc., manufactures small electrical appliances and has recently introduced an innovative new dessert maker for frozen yogurt and tofu that has the clear potential to offset the weak pricing and sluggish volume growth experienced during recent periods. Monthly demand and cost relations for Presto’s frozen dessert maker are as follows:P = $60 – $0.005QTC = $100,000 + $5Q + $0.0005Q2 MR = ?TR/?Q = $60 – $0.01QMC = ?TC/?Q = $5 + $0.001QSet up a table or spreadsheet for Presto output (Q), price (P), total revenue (TR), marginal revenue (MR), total cost (TC), marginal cost (MC), total profit (p), and marginal profit (Mp). Establish a range for Q from 0 to 10,000 in increments of 1,000 (i.e., 0, 1,000, 2,000, . . . , 10,000).Using the Presto table or spreadsheet, create a graph with TR, TC, and p as dependent variables, and units of output (Q) as the independent variable. At what price/output combination is total profit maximized? Why?

At what price/output combination is total revenue maximized? Why?

Determine these profit-maximizing and revenue-maximizing price/output combinations analytically.

In other words, use Presto’s profit and revenue equations to confirm your answers to part B.Compare the profit-maximizing and revenue-maximizing price/output combinations, and discuss any differences.

When will short-run revenue maximization lead to long-run profit maximization?


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