Decision Point: Short-Term Profit Maximization

Because yours was the first such engine to exist, and you've spent some money in the past on advertising and branding, you can still charge a price above marginal cost, but the days of monopoly profits are behind you.

Now that you have your team oriented to this new competitive market, you need to figure out how to maximize profits in the short term. Your market research company has revised the demand to be the demand for your company's Hydro-gine, not the overall market demand for motorcycle engines that run on water, asQ^d= 8,000 - 0.8P. You've correctly determined that the associatedMRfunction isMR= 10,000 - 2.5Q. Your fixed cost has not changedit's still $4 million. Your marginal cost also has not changed; it's still $2,000 per engine, so you have calculated thatMR = MCat a quantity of 3,200 engines per year. These engines, however, now sell for a price of only $6,000. Your profit-maximizing scenario is shown in the graph.