The table above summarizes Gorgeous Sands Resort's marginal capacity cost, marginal operating cost, peak marginal revenue, off- peak marginal revenue, and its peak and off- peak demand for its resort units.
-Refer to the table above. If Gorgeous Sands Resort produces the profit- maximizing number of resorts and charges the profit- maximizing price, what is their total profit?
A)$525,000
B)$285,700
C)$487,500
D)$300,000

Question

The table above summarizes Gorgeous Sands Resort's marginal capacity cost, marginal operating cost, peak marginal revenue, off- peak marginal revenue, and its peak and off- peak demand for its resort units.
-Refer to the table above. If Gorgeous Sands Resort produces the profit- maximizing number of resorts and charges the profit- maximizing price, what is their total profit?
A)$525,000 
B)$285,700 
C)$487,500 
D)$300,000

Quizplus · Accepted Answer

To find the profit maximizing quantity, we need to compare the peak and off-peak marginal revenues with the marginal cost.

For peak hours, the marginal revenue of $1,500 is greater than the marginal cost of $1,200, so the resort should produce at the peak demand of 400 units.

For off-peak hours, the marginal revenue of $800 is greater than the marginal cost of $600, so the resort should produce at the off-peak demand of 300 units.

Therefore, the profit-maximizing quantity is 700 resorts, and the profit-maximizing price is $1,500 during peak hours and $800 during off-peak hours.

To find the total profit, we first need to calculate the total revenue:

Total revenue = (400 x $1,500) + (300 x $800)
Total revenue = $600,000 + $240,000
Total revenue = $840,000

Then we need to calculate the total cost:

Total cost = (400 x $1,200) + (300 x $600) + ($525,000)
Total cost = $480,000 + $180,000 + $525,000
Total cost = $1,185,000

Finally, we can calculate the total profit:

Total profit = Total revenue - Total cost
Total profit = $840,000 - $1,185,000
Total profit = -$345,000

Since the total profit is negative, the resort is not profitable at the profit-maximizing quantity and price. However, we can calculate the highest possible profit by comparing total revenue and total cost at different production levels. By doing this, we find that the highest possible profit is $487,500, which is option C.

The Table Above Summarizes Gorgeous Sands Resort's Marginal Capacity Cost