Question: 21st Century Insurance offers mail order automobile insurance to preferred risk

21st Century Insurance offers mail-order automobile insurance to preferred risk drivers in the Los Angeles area. The company is the low-cost provider of insurance in this market but doesn't believe its annual premium of $1,500 can be raised for competitive reasons. Rates are expected to remain stable during coming periods; hence, P = MR = $1,500. Total and marginal cost relations for the company are as follows:
TC = $41,000,000 + $500Q + $0.005Q2
MC = ∂TC/∂Q = $500 + $0.01Q
A. Calculate the profit maximizing activity level.
B. Calculate the company's optimal profit, and optimal profit as a percentage of sales revenue (profit margin).

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  • CreatedFebruary 13, 2015
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