Sunday
April 20, 2014

Homework Help: Microeconomics - profit maximisation

Posted by needhelpplease on Sunday, October 15, 2006 at 7:37am.

Hi, I would really appreciate if someone could help me out on this question! Im not looking to cheat I just want some kind guidance on how to do the question. Ive looked and I honestly dont know!

Given the demand function P = 100 - .005Q a producer must pay $20 per unit in manufacturing costs and also $20 in rent

1. WHat price will maximise the producer's profit? How much profit will the producer earn? What will be the total rent payment earned by the landlord?

2. If the producer and landlord entered into a profit sharing agreement in which the landlord gets 40% of the profit and the producer 60%. What price should the producer set to maximise profit?

3. Will both the landlord and producer prefer the profit sharing agreement or the original agreement? Which agreement will the customer prefer?

4. Given the demand and cost conditions above suppose the royalty payment was 15% of sales revenue to the landlord. Prove there is a conflict between the landlord and producer in that the landlord has an interest in the books price being lower than the price which maximises the producers profit.


Hmmmm.
Your question reads almost exactly like the "economic textbook" question posted by Godfrey on Sunday Oct 15.

However, in Godfrey's question, the producer is a book publisher. He pays a $20 per-book royalty to the book's author. In your question, the producer pays a $20 rent. Rents tend to be fixed costs. Do you really mean a $20 per-unit of output rent (royalty) payment?
If so, see my response to Godfrey.
If not, then your question begs clarification.

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