Question: Profit versus Revenue Maximization Presto Products Inc recently introduced an

Profit versus Revenue Maximization. Presto Products, Inc., recently introduced an innovative new frozen dessert maker with the following revenue and cost relations:

P = $60 - $0.005Q TC = $88,000 + $5Q + $0.0005Q2

MR = ∂TR/∂Q = $60 - $0.01Q MC = ∂TC/∂Q = $5 + $0.001Q

A. Set up a spreadsheet for output (Q), price (P), total revenue (TR), marginal revenue (MR), total cost (TC), marginal cost (MC), total profit (π), and marginal profit (Mπ). Establish a range for Q from 0 to 10,000 in increments of 1,000 (i.e., 0, 1,000, 2,000, ..., 10,000).
B. Use the spreadsheet to, create a graph with TR, TC, and π as dependent variables, and units of output (Q) as the independent variable. At what price/output combination is total profit maximized? At what price/output combination is total revenue maximized?
C. Determine these profit-maximizing and revenue-maximizing price/output combinations analytically. In other words, use the profit and revenue equations to confirm your answers to part B.
D. 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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  • CreatedFebruary 13, 2015
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