Question

Begin by discussing the Profit Maximization model and its corresponding formula Ï= pq - cq. Think of a product you might buy in bulk from a store like Costco. Think about how much the price is per unit and what you think the cost per unit might be. How many units come in a bulk container of your product? What would the profit be, based on your assumptions about the costs and price of the product?

Next, market prices are set based on the supply and demand of a good or service, rather than by some external decision-making entity. This is because people are seeking to maximize their utility and businesses seek to maximize their profit, and the goal of a functioning market is to find that point where utility gets as high as it can without dipping into the profit margin. This interplay of people's desires and the amount available create what was called by Scottish Enlightenment philosopher Adam Smith as the "invisible hand" of God in his book The Wealth of Nations. Hopefully, the end result will be equilibrium as indicated in the Marshallian Supply-Demand Cross. Government, meanwhile, seeks to maximize the public welfare, and steps in when there are certain economic outcomes desired but not being met - in what we refer to as socialism (note: every capitalistic country engages in some degree of socialism - it is the extent to which that occurs that decides whether we call the country capitalist or socialist). What happens to the invisible hand when the government steps in?