Small Business Development (EP60029) Date: 03.11.

2023

Solved Pricing Class Assignment

Q1. Zicon Manufacturing produces two types of automobile vacuum cleaners. One which we denote as product X,
Plugs into the cigarette lighter receptacle; the other, product Y, has rechargeable batteries. Assuming that there is no
relation between the two products other than the apparent substitutability in consumption, the manager of Zicon
wanted to determine the profit-maximizing levels of production and price for the two products.

The forecasted demand functions for the two products are:

QX = 80,000 – 8,000 PX + 6,000 PY

QY = 40,000 – 4,000 PY + 4,000 PX

The production manager obtained estimates of the total cost functions:

TCX = 7.5QX + 0.00025Q2X and TCY = 11QY + 0.000125Q2Y
Determine the profit maximization outputs, profit maximization prices and profit earned by Zicon.

Ans. 1
PX = 70 – 0.0005 QX – 0.00075 QY and PY = 80 – 0.001 QY – 0.0005 QX
The total revenue functions for each product are:
TRX = PXQX = 70QX – 0.0005Q2X – 0.00075QYQX and TRY = PYQY = 80QY – 0.001Q2Y – 0.0005 QXQY
TR = TRX + TRY
The associated marginal revenue functions for each product are (on partial differentiation of respective total
revenues:
MRX = 70 – 0.001QX – 0.00125QY and MRY = 80 – 0.002QY – 0.00125QX
The associated marginal cost functions for each product are (on partial differentiation of respective total costs):
MCX = MRX = 70 - 0.001QX – 0.00125QY = 7.5 + 0.0005QX and
MCY = MRY = 80 - 0.002QY – 0.00125QX = 11 + 0.00025QY

Solving these equations simultaneously for QX and QY, the profit-maximizing outputs were found to be:
QX = 30,000 and QY = 14,000. Using these outputs in price functions, the manager of Zicon found that the profit-
maximizing prices for X and Y were:

PX = 70 – 0.0005 (30,000) – 0.00075 (14,000) and PY = 80 – 0.001 (14,000) – 0.0005 (30,000)

PX = $44.50 and PY = $51

Total revenue from selling the optimal amounts of X and Y was, TR = TRX (PXQX) + TRY (PYQY) = $2,049,000
Total cost of producing the optimal amounts of X and Y was, TC = TCX + TCY = $628,500
The manager expected Zicon Manufacturing to earn profit of: Profit = $2,049,000 - $628,500 = $1,420,500

Q2. Surefire Products, Inc., manufactures two products X and Y that are unrelated in consumption but are
substitutes in production. The owner can increase or decrease the total number of hours that the firm can use its
production facilities. The owner wants to know: What is the optimal level of usage (hours of operation) of the plant?
How should the level of usage be allocated between the productions of the two products?

QX = 60 – 0.5PX and QY = 40 – 0.67PY

Discussion with the plant supervisor indicated that in one hour of production time either 2 units of X or 4 units of Y
could be produced, i.e., QX = 2HX and QY = 4HY where HX and HY are denote hours of assembly-line time in the
production of X and Y.
From the production functions the marginal products are MPHx = 2 and MPHy = 4.
Using the demand forecasts and the estimates of the production functions provided by the plant supervisor, estimates
if the marginal revenue product of the production facility in production of X and Y were MRPHx = MRX × MPHx and
MRPHy = MRY × MPHy
MC = 72 + 2HT
Small Business Development (EP60029) Date: 03.11.2023

Ans. 2
PX = 120 – 2QX and PY = 60 – 1.5QY
From these inverse demand functions, the marginal revenue functions were:
MRX = 120 – 4QX and MRY = 60 – 3QY

As, QX = 2HX and QY = 4HY and MPHx = 2 and MPHy = 4, therefore:

𝑀𝑀𝑀𝑀𝑀𝑀𝑋𝑋 = 𝑀𝑀𝑀𝑀𝑋𝑋 × 𝑀𝑀𝑀𝑀𝐻𝐻𝐻𝐻 = [120 – 4 (2Hx)] x (2) = 240 – 16Hx

𝑀𝑀𝑀𝑀𝑀𝑀𝑌𝑌 = 𝑀𝑀𝑀𝑀𝑌𝑌 × 𝑀𝑀𝑀𝑀𝐻𝐻𝐻𝐻 = [60 – 3(4Hy)] x (4) = 240 – 48Hy

To obtain the total marginal revenue product function, these two curves were summed horizontally i.e., these
functions were inverted to find Hx and Hy, the hours were summed, HT = Hx + Hy, then the inverse was taken once
again. The resulting total MRP was: MRPT = 240 – 12HT

Equating the total MRP of an hour’s usage of the plant with the marginal cost of an additional hour’s usage,

MRPT = MC → 240 – 12HT = 72 + 2HT

Solve for HT and the manger found that the optimal level of usage of the plant was, HT = 12 hours per day

At this level of usage, MRPT = MC = $96. To allocate these hours between the production of X and Y, the marginal
revenue products for the production facility in the production of X and Y must both be equal to $96.

240 – 16Hx = 96 and 240 – 48Hy = 96, so HX = 9 hours and HY = 3 hours

From production functions, the quantity of X produced is 18 (= 2 x 9) units and the quantity of Y produced is 12 (=
4 x 3) units. The prices are PX = $84 [= 120 – 2(18)] and PY = $42 [= 60 – 1.5(12)].

Q3. ChemTech Corporation produces refined chemicals, and two of these chemicals are complements in production.
As it refines the raw chemical input, the processes yield equal amounts of xylene and ylene denoted by X and Y.
The owner of ChemTech must determine the profit-maximizing amounts of xylene and ylene to produce and the
prices to charge.

QX = 285,000 – 1000PX and QY = 150,000 – 2000PY where quantities is in gallon drums and prices in $.
Note that MRY is equal to 0 at an output of 75,000 drums. Over the range of output from 0 to 75,000 units, the joint
marginal revenue function is the vertical summation of the two marginal revenue curves:

MRJ = MRX + MRY

And Q represents both QX and QY (Q = QX = QY)

MC = 10 + 0.002Q

For profit-maximization: MRJ = MC

Ans. 3
MRX = 285 – 0.002QX and MRY = 75 – 0.001QY
MRJ = 285 – 0.002QX + 75 – 0.001QY = 360 – 0.003Q (where Q = QX = QY)
If production of the joint product exceeds 75,000 drums, the production of ylene in excess of 75,000 drums will be
destroyed, discarded, or disposed of somehow rather than sold.

MRJ = MC → 360 – 0.003Q = 10 + 0.002Q

Solving the equation for the production level of the joint product, the profit-maximizing level of output is 70,000
drums. From demand functions, the profit-maximizing prices for xylene are $215 per drum and for ylene are $40
per drum. Using the profit-maximizing pricing decisions results in total revenue of $17,850,000 [= (215 + 40) x
70,000].