I must write a report explaining to the board of directors of Pearson Elictrical Products explaining and justifying the number of hairdryers they should produce based on a small amount of information they have given me.
Information I will need to be able to complete the set task; Total fixed costs; in the short run these will not change with output and will therefore be a straight horizontal line when costs and output are graphed. Total costs and total variable costs; these will have a similair shape and run parallel to each other. The TVC curve will will be below the TC curve. The vertical distance between the two being equal to TFC Average fixed coasts; these costs will always by definition continue to fall as output increases. They will thus slope from right to left. Average variable cost; The curve will have a ‘U´ shape. First AVC´s will fall, then thry will start to rise as a result of diminishing marginal returns. Average total costs; this curve will have a similaor shape to the AVC curve. However, it falls more steeply initially and rises more slowly after reaching a minimum point. This is due to the impact in the constant fall in ATC as output increases Marginal costs;The marginal cost shape will be ‘U´ shaped. It will intersect the ATC and AVC curve at their lowest points. This is because when the marginal cost is lower then the ATC or AVC these must fall. When the MC curve intersects the ATC will be lowest cost of production. Equations to help me gather the information I need; AFC=TFC/QAVC=TVC/QATC=TC/Q MC=Change in TC/Change in Q To help me gather the information I need to complete the task I am going to set up a spreadsheet. This should help me with some of the complex equations involved in this task and also reduce the amount of time it takes me to complete the task. You can see the table the table with all my equations inputed. Conclusion
Like any firm PEP wants to maximize profits. This can be accomplished through the “total revenue-total cost method,” or the “marginal revenue (MR) equals marginal cost (MC) method.” By producing an output in which MR equals MC the firm will not only guarantee that it is maximizing profit, if a profit is being earned, but will be minimizing losses if they are incurred.This can be observed on my graph when MR is equal to MC at about (4500,60) where both MR and MC is equal to £60. So my conclusion is PEP should produce 4500 hairdryers if it is maximize proffits