Possibly Due Medalin Benefitting Economies -Myassignmenthelp.Com

Question: Discuss About The Possibly Due Medalin Benefitting Economies? Answer: Introducation: We look at the data given in the spreadsheet to arrive at a few conclusions on the market structure in which DermaPlus sells, and the corresponding level of sales that can maximize profits for it. We look into the relation between costs, profits and output. We use the words - output and sales alternately here as we are told that, it can sell as much of the cream as it likes at the prevailing market price. So whatever will be produced as OUTPUT can be sold as part of SALES. Major Issues: We have two main issues here. The first is to ascertain the output level that maximizes profits for Medalin from DermaPlus. This will involve estimation of the cost curves and arriving at the total costs of producing DermaPlus. The second issue is to determine an estimate of the output for the next 12 months. The exercises in these two issue range from estimation of costs curves using regression, analyzing the market structure, applying the rule of profit maximizing and calculation of expected profits. Analysis Note that Medalin operates in a perfectly competitive structure, so that it has to take only output decisions. Price determination is not in its hands. The rest of the report is based on this assumption. Profit Maximizing Average Daily Production Capacity Profits can be defined as the difference between revenues or total revenues (TR) and total costs. These costs include variable and fixed costs, both of which are explicit costs. Implicit costs are excluded here. Profit maximization is given at an equilibrium point, where this difference is maximum. We show this graphically in figure 1 below. The red vertical line is profits. The output corresponding to this profit level is Q*- called the equilibrium or profit maximizing level of output. we can do this another way using mathematical tools. since both depend on output level (Q), we can write R as a function of Q. this is seen in the diagram above where Q is on the X axis. Denote total revenue by R(Q) and total cost by C(Q), so that profits equal = R(Q) C(Q) using rules of maximization, when d/dQ = 0, we get the point of maximization. taking first order derivatives, R(Q) C(Q) = 0 or R(Q) = C(Q) Where R(Q) is Marginal revenue (MR) and C(Q) is Marginal cost (MC). SO MR=MC is the condition for equilibrium. this assumes that Medalin is a rational firm that seeks to maximize profits. the second order condition for maximization tells us that at the point of first order condition MC must be rising. Both these conditions are shown in figure2, which uses MR and MC curves instead of TR and TC. We can see that at E the MC is rising. MR is horizontal, as we are operating in a perfectly competition scenario. The extra revenue from selling an additional unit remains equal to P (price) . This price is not in control of Medalin. It is based on industry demand and supply. Now we need two things - MR and MC Determination Of Mc Lets look at MC first. We use the estimated AVC equation: AVC = 82.14418-0.41197Q+0.000711Q2 We calculate Total variable cost (TVC) where TVC = AVC*Q. TVC = 82.14418Q-0.41197Q2+0.000711Q3 Marginal cost (MC) = dTVC/dQ = 82.14418 - 0.82393Q+0.002132Q2 DETERMINATION OF MR we need price which is same as MR here. It is given that there are 5% chances that price will be $50 per unit, 20% chances that price will be $100 per unit, and a 75% chance that price will be $150 per unit. Since MR=P in perfect competition, we can conclude that probability of price being $50 is 0.05, probability of price being $100 is 0.2, probability of price being $150 is 0.75. We now use these three prices to calculate equilibrium level of output that maximizes profits. In each case we equate MC with P. Case 1: P= 50 82.14418 - 0.82393Q+0.002132Q2 = 50, on solving this we get Q = 342 approx. Case 2: P= 100 Now 82.14418 - 0.82393Q+0.002132Q2 = 100, solving this gives Q = 407 approx. Case 3 P=150 82.14418 - 0.82393Q+0.002132Q2 = 150, and Q = 457 approx. Probability Price(P) OPTIMAL Q Profit = TR- TVC- TFC 0.05 50 342 27762.31473 0.2 100 407 51925.26368 0.75 150 456 77565.07156 As price is uncertain we have uncertain profits. At best we can get an estimate of expected profits, which is a weighted average of the profits calculated, where the weights are the probabilities of each level of profits. expected daily profit = (0.05*27762.31473)+(0.2*51925.26368)+(0.75*77565.07156)= $69946.97214. Estimated Average Daily Production For Future As shown above, we cannot be sure of an optimal profit level, as the price is uncertain. Lack of certainty on price makes profits uncertain as profits are based on revenues derived from price levels. When we talk of the future, there is more uncertainty as we cant account for unexpected changes in the industry. Assuming away such events and the consequent effects on prices, we have to assume some price to calculate the estimates for future production. Out of the three possibilities given the most likely is P= 150 as it has highest probability of 75%. if we assume that this price will remain over next 12 months then the best daily production capacity is Q= 456. Report Summary Recommendations Using the data given by Shawn, we have shown that a few assumptions lead us to 3 possible scenarios. These assumptions include profit maximization for Medalin as a firm and a perfectly competitive structure for the market in which it sells DermaPlus. Once we assume these, we can calculate optimal output levels. The expected profits are also uncertain as rice is uncertain. Being risk neutral we can choose the price which highest possibility to plan the future production levels. This comes out to be $150 as price and $69947 as profits. As a strategy for the future, the government must be lobbied for fixing a high price. it has been shown that higher price lead to higher revenues, and higher profits. This relation between price and profits implies that revenues rise more than costs as output in increased in response to higher price. This can be possibly due to Medalin benefitting from economies of scale. References Bus 101: Introduction to Business. (n.d.). Retrieved Oct 2, 2017, from Learn.saylor.org: https://learn.saylor.org/mod/page/view.php?id=8871 Cost concepts. (n.d.). Retrieved Oct 8, 2017, from Pitt.edu: https://www.pitt.edu/~upjecon/MCG/MICRO/COST/Costs.html Costs. (n.d.). Retrieved Oct 7, 2017, from Tutor2u.net: https://www.tutor2u.net/economics/topics/costs MR=MC rule. (n.d.). Retrieved Oct 2, 2017, from Courseera.org: https://www.coursera.org/learn/principles-of-microeconomics/lecture/zKD8R/pricing-and-production-rules-p-mr-mc-the-shutdown-rule Perfect Comnpetition in the Long run. (n.d.). Retrieved Oct 5, 2017, from Open.lib.umn.edu: https://open.lib.umn.edu/principleseconomics/chapter/9-3-perfect-competition-in-the-long-run/ perfect competition. (n.d.). Retrieved Oct 2, 2017, from Staffwww.fullcoll.edu: https://staffwww.fullcoll.edu/fchan/Micro/4perfect_competition.htm Regression analysis. (n.d.). Retrieved Oct 6, 2017, from Home.iitk.ac.in: https://home.iitk.ac.in/~shalab/regression/Chapter2-Regression-SimpleLinearRegressionAnalysis.pdf