# Calculate Maximizing Profit by charting demand curve, revenue, and costs

## The Assigned Homework Problem

War Game, Inc. produces games that simulate historical battles. The market is small but loyal, and War Game is the largest manufacturer. It is thinking about introducing a new game.

Based on historical data regarding sales, War Game management forecasts demand for this game to be P = 50 – 0.002 Q, where Q denotes unit sales per year, and P denotes price in dollars. The cost of manufacture (based on royalty payments to the designer of the game, and the costs of printing and distributing) is C = 140,000 + 10Q.

Calculate the following, assuming that War Game maximizes profit:

a. Quantity

b. Price

c. Total cost

d. Total revenue

e. Total profit

## Price Demand Curve: Plot Price and Quantity

All of the formulas and factors are interrelated, so it can be approached like solving simultaneous equations in algebra. Another approach is to chart the revenue and expenses at different levels of production. Calculate the profit at each level, looking for the maximum profit and answer the questions at that point. Let’s start with the demand curve as it relates price to quantity. Price demand starts at \$50 at quantity zero and falls with every unit of production until it reaches zero price at a quantity produced of 25,000. It looks like this:

We obviously don’t want a negative price, so the relevant range for this exercise is for quantities from 0 to 25,000.

## Plot Total Revenue

With price at each quantity, we can calculate revenue.

Total revenue equals price times quantity (TR = P*Q).

It looks like this for War Game Inc.:

## Plot Total Costs

We are given the formula for total costs as \$140,000 (fixed cost component) plus \$10 per unit produced (variable cost component) as

C = 140,000 + 10Q

It plots like this:

## Plot Total Costs and Total Revenue together

Here we see Total Revenue and Total Costs plotted together.

That area below revenue that is above costs is the area where profit is possible. We can narrow the range down to profit starting at 5,000 and ending by 15,000.

## Plot Total Profit

Here is the plot of Total Profit = Total Revenue – Total Cost: