BMAN A0001 Quantitative Methods for Management 27/09/2010

Exercises 2.11. Non-linear optimisation problems

1. A television manufacturer wishes to determine the price for a new portable model that will
maximise the companys current profit on the model. In manufacturing the product, the company
will incur fixed costs of 300,000 and variable costs of 20 per unit.
The estimate of demand is given by
Q=15,00080P,
where Q is the quantity demanded and P is the price. Find the optimum price and determine the
level of demand, costs and profit at this price.

2. Suppose a manufacturer can sell X bicycles per year at a price of P=300-0.01X pounds apiece,
and that it costs him C(X)=60,000+75X pounds to produce X bicycles.
(a) For maximum profit, what should his production level be and what price should he
charge?
(b) If the government imposes on the manufacturer a tax of 25 for each bicycle and the
other features of the situation are unchanged, how much of the tax should he absorb himself and
how much should he pass on to his customers if he wishes to continue making the maximum
profit?

3. A street vendor finds that he can sell 200 soft drinks a day at a price of 50 pence a drink, but
he can sell 10 more for every 1 penny that he lowers the price of a drink.
(a) What price maximises his total revenue? Solve the problem, using the optimisation
approach.
(b) Suppose the vendors supplier charges him 20 pence a drink. What price maximises
his total profit? How much money will he lose if he makes the mistake of maximising his
revenue rather than his profit?