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Unformatted text preview: MGMT 407.04 Summer 2009 In Class Problem no. 1 Solution July 14, 2009 Problem 2.7 Profit Maximization: Equations. 21 st Century Insurance offers mail- order automobile insurance to preferred-risk drivers in the Los Angeles area. The company is the low cost provider of insurance in this market but doesnt believe its annual premium of $1,500 can be raised for competitive reasons. Rates are expected to remain stable during coming periods; hence, P+MR+$1,500. Total and marginal cost relations for the company are as follows: TC=$41,000 + $500Q + $0.005Q 2 MC=$500 + $0.01Q A. Calculate the profit maximizing quantity. B. Calculate the companys profit at the profit maximizing quantity, and profit as a percent of sales revenue (profit margin) at that level of output. Profits are maximized when marginal revenue is equal to marginal cost. Since this market is competitive, the firm is a price taker and marginal revenue equals price. See the PROFIT RELATIONS section of our textbook, pp. 34-38.section of our textbook, pp....
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- Spring '11