A chemical company is planning to launch a new fertilizer and carries out a
market survey in order to determine the likely demand. The survey indicates
that the company can expect to sell between 1,000 and 2,000 tons per month
and that the relationship between price charged and quantity demanded will be
as follows:
Price (Sh. ‘000’ per ton) 16 15 14 13 12
Monthly demand in thousand
tons
1.00 1.25 1.50 1.75 2.00
The company estimates that the marginal cost (in Sh. ‘000’) of producing the
fertilizer can be represented by the equation:
MC = 2X2
– X + 5
Where X is the monthly output in thousands of tons
The fixed costs will be Sh. 100,000 per month.
Required:
(i) Determine the quantity and price which should be produced and
charged respectively to maximize revenue and profit. (8
marks)
(ii) Determine the maximum revenue and profit. (4 marks)
(iii) Why is the value of maximum revenue different from maximum profit in
(ii) above? (2 marks)
(b) Under what circumstances would maximum revenue be equal to maximum
profits?
(2 marks)