It is assumed that the toothpaste market is perfectly competitive and the current price of a case of toothpaste is $42.00. CPI has estimated its marginal cost function to bas follows: MC=.006Q.
The Board would like to know how many cases of toothpaste should be produced in order to maximize profits.
What would happen if CPI decided to raise prices unilaterally in this toothpaste market?
What would happen to the profit maximizing level of output if the market price suddenly rose to $54 per case? Explain why the output level changes.
Could CPI benefit by advertising in this perfectly competitive market?
Do a little research, then take a shot. What do you think?
Hint: Maximize profit where MC=MR. In a perfectly competitive market MR=P.
Hint2: the demand curve facing a firm in a perfectly competitive market is a horizontal line. (in economics terms: perfectly elastic)
Profits for producing toothpaste is 42 - .006 = 41.994
2.a case of toothpaste is $42.00. CPI has estimated its marginal cost function to bas follows: MC=.006Q.
What would happen if the prices unilaterally raised in this toothpaste market?
To determine the profit maximizing level of output in a perfectly competitive market, we need to equate the marginal cost (MC) to the market price. In this case, MC is given as MC = 0.006Q, where Q is the quantity of toothpaste produced.
To maximize profits, we set MC equal to the market price: 0.006Q = $42.00. Solving for Q, we have Q = $42.00 / 0.006. Evaluating this expression gives Q = 7,000 cases of toothpaste.
If CPI decided to unilaterally raise prices in the toothpaste market, it would no longer be perfectly competitive but would become a monopolistic competition. In monopolistic competition, firms have some degree of market power and can influence prices. By raising prices, CPI could potentially increase its profits if the demand for toothpaste is price-inelastic. However, if demand is price-sensitive, consumers may switch to alternative toothpaste brands, and CPI's sales volume could decrease, resulting in lower profits.
If the market price suddenly rose to $54 per case, the profit maximizing level of output would change. To determine the new quantity, we need to equate the marginal cost to the new market price: 0.006Q = $54.00. Solving for Q gives Q = $54.00 / 0.006. Evaluating this expression gives Q = 9,000 cases of toothpaste. The output level increases because the higher market price allows CPI to cover its higher marginal costs while still earning a profit.
In a perfectly competitive market, advertising does not provide a significant benefit. In this market structure, products are homogenous, and consumers make purchasing decisions based on price alone. Therefore, advertising would not directly influence consumer behavior or demand for CPI's toothpaste. In such a market, competing on lower prices would be more effective in attracting customers and maximizing profits.