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Economic Optimization
Effective managerial decision revolves around economic optimization that refers to the best solution to the problem. Among many alternative courses of action, the best decision is consistent with managerial objectives.
Economic Optimization
Optimal Decision the decision that produces a result consistent with the managerial objectives is the optimal decision. The objective is to Maximize the value of the firm n Value = profit/(1 + i)t =TR-TC/(1+i)t t=1
Economic Optimization
As far as value of the firm is concerned it involves the analysis of TR, TC and the discount factor. For optimal decisions integration among marketing, production, and financial aspects is a must.
Marginal Analysis
This is the basic decision making method to identify the optimal location. Marginal Analysis (MA) is the process of considering small changes in a decision and to determine whether the change will improve the ultimate objective.
Revenue Maximization
Revenue maximization occurs at the point of greatest total revenue Set the MR = 0 and solve for Q MR =0 57.5 2.5Q = 0 Q = 11.5 TR = 57.5Q 2.5Q2 = 57.5(11.5) 2.5(11.5)2
Revenue Maximization
Graph
Revenue maximization
= 661.25 - 330.625 TR = $330.625 If fewer than 11.5 units are sold TR can be increased by expanding output. If more units are sold TR will fall.
Profit Relations
Total and Marginal Profit
Numerical Examples
Tprofit = -3000 2400Q + 350Q2 - 8.33Q3 MR = 2400 + 700Q 25Q2 Equate to 0 Formula a = 25, b = 700, and c = 2400 X1 = 4 X2 24
Example
Use of Marginal's to maximize the Difference between Two Function TR = 41.5Q 1.1 Q2 TC = 150 + 10Q 0.5Q2 + 0.02Q3 Tprofit = TR-TC TP+ -150 + 31.5Q 0.6Q2 0.02Q3 Marginal profit = = 41.5 1.2 Q 0.06Q2
Example
MC = 10 1.0Q +0.06Q2 MR = 41.5 2.0 MR = MC = 31.5 1.2Q -0.06Q2 = 0 Solving Q1 = -35 and Q2 =15