Managerial Economics

Managerial Economics This research paper is aimed at providing a description the relationship between the variable quantity of an oil refinery company, the relationship between total cost and total revenue and how maximum profit is realised. It also shows the relationship between the output of the commodities Y1 and Y2 about the Langrage Multiplier Introduction According to Lemaréchal (2007), a variable is a unit of measure that is used in business to determine the cost of production that the organisation is likely to incur during the process of creation of output given some inputs. Therefore, the total cost of the production process is the summation of fixed price and variable costs of a business. Fixed value are those costs that a company is likely to incur even without producing any output for example land rates while variable costis those costs that a businesssuffers in the production of one unit of production.

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MANAGERIAL ECONOMICS

Total Revenue (TR) is the amount of income that a business receives from selling all goods that it has produced while Total Cost (TC) is the sum of all costs the company has incurred in the process of production. Profit calculation is Total Cost Subtracted from Total Revenue.

Profit (P) = Total Revenue (TR)-Total Cost (TC) Marginal Cost (MC) is an additional cost that a firm realises from producing an additional one unit of output, while Marginal Revenue (MR) is the one unit increase in revenue due to an additional quantity sold after production. Both Marginal cost and Marginal Revenue are a derivative of their respective Total Cost and Total Revenue I.e. Dy/DTR= MR; DY/DTC=MC The analysis in the excel file shows that, as variable quantity increases, the value of profit also increase. This increase is realised up to 300 units of crude oil, where the value of the marginal profit starts to fall. This is because, as the firm continues to produce, the firm increased production until when the Marginal Cost was equal to Marginal Revenue, whereby the maximum profit at that point is equal to zero.

The refining company continued to add more quantities of oil production to the production of products Y1 and Y2, until when the Langrage Multiplier was tending to a negative value (300 units of Oil). Thisis done because the firm is trying to affirm its price level of the outputs produced. If the profit of the firm starts to fall at the marginal production level, the company may decide to scale back the production process or shut down temporarily until the business put up again.

MANAGERIAL ECONOMICS A langrage multiplier is a mathematical approach that is used to combine the quantity that is maximized (Profit) with the functions that describe the output or the constraints functions (Lemaréchal, 2007). The graph in the excel file shows all the possible outcome of profits if a combination of outputs Y1 and Y2 are added together. The graph is used to calculate the maximum and the minimum points through with the combination of commodities Y1 and Y2 can yield maximum profits. The graph shows that maximum benefitis realised when the organisation produces 5.72Y1 and 2.87Y2 in that the langrage multiplier is 0.45 meaning that it is greater than 0, i.e. LM>0.

MANAGERIAL ECONOMICS Reference Lemaréchal C. (2007). "Lagrangian relaxation". In Jünger, Michael; Naddef, Denis. Computational combinatorial optimization: Lecture Notes in Computer Science. 2241 (pp. 112–156). Berlin: Springer-Verlag..