To know: The profit-maximizing amounts of electricity, optimal price and company’s profit.
Explanation of Solution
Electricity is produced by two facility which is public utility.
Given is the inverse demand function:
To find the marginal revenue of a public utility, derivation is done for total revenue.
Cost function of facility 1 for producing electricity:
Marginal cost of facility is given as follows:
Cost function of facility 2 for producing electricity:
Marginal cost of facility is given as follows:
Condition for profit maximizing situation is as follows:
For facility 1, profit maximizing condition is:
For facility 2, profit maximizing condition is:
Solving equations simultaneously,
Thus, the profit maximizing amounts of electricity produced at facility 1 are 33.33 kilowatts hours and that produced in facility 2 is 66.66 kilowatts hours ,thereby totaling the output combined for facility 1 and facility 2 to 100kiilowatt hours.
The optimal price is given as:
Hence, the optimal price charged by the public utility provider of electricity is $800 per kilowatt hours.
The utility company’s profit is given by:
Hence, the utility company’s profit is $46000.
Introduction:
Profit of a firm is maximized when marginal revenue is equal to marginal cost.
Marginal benefit is the additional benefit to the total for receiving a particular good or service.
Marginal cost is the addition to total cost when one more unit of good is produced.
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Chapter 8 Solutions
Managerial Economics & Business Strategy (Mcgraw-hill Series Economics)