Q2 Z2,(Q2) Z2(Q2) - Institute for Water Resources - U.S. Army

Initially, the determinants of a firm's demand for a
single type of transportation will be examined. The following
notation is employed:
IT the producing firm's profit
Q the quantity the firm produces and ships
the market price of the firm's product
ek the time required to ship the goods from •
point of production to the point of sale
the transport charge per unit of product
i the interest rate
the damage, pilferage, loss, or perishability
rate
The firm's profit is:
1) . • -rr ( „ -t (k)
In this equation, the second termHon the right side is
the total cost of production. The numerator of the first
term is net revenue. This is defined as total revenue, PQ,
times (1-) ) minus total transportation cost, TQ. times (1-J1 )
The total revenue is multiplied by (1-) ) because only
(1-) ) of the goods produced ever reach the market, i.e.
only = (l-p )Q sellable goods actually arrive at C,
although Q left from B. 2 Transport rates are payable for
services rendered and for only non-damaged goods. Since
this net revenue is received only after at days, it is
divided by (1+i) determine its present value.
• •
2 It is assumed here that the firm bears the cost of damage,
etc. If the transportation firm "made good" on all losses,
• the producing firm would behave as if p =0 and end up
selling )3 % of Q to the transport company.
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