Optimal Price

Optimal Price - Marginal Rule (2) Therefore, if the firm is...

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1 Profit-Maximizing Price and Quantity 1. New Formula for Profits. 2. Shutdown Rule 3. Marginal Rule. 4. Optimal Markup. New Formula for Profits Recall: Profit = R – C Recall: AC = C/Q => C = AC x Q Recall: R = P x Q Profit = P x Q AC x Q =(P AC) x Q Shutdown Rule If the D curve lies below the AC curve at every point, then the firm should shut down (choose Q=0). If the D curve lies above the AC curve at some points, then the firm should produce (choose Q>0). Marginal Rule If the firm produces a quantity where MR MC>0, then it could increase its profits by producing more. If the firm produces a quantity where MR MC<0, then it could increase its profits by producing less.

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Unformatted text preview: Marginal Rule (2) Therefore, if the firm is maximizing profits, it must be producing a quantity where MR=MC. Markup A firms markup is the percentage by which its price exceeds its marginal cost. Markup = (P-MC)/P ( 1) Example: If a firms marginal cost is \$4, and it sets a price of \$5, then its markup is 20%. 2 Elasticity and Markup Equivalent statement of the marginal rule: Profit-maximizing markup = 1/|elasticity| Special Pricing Situations |elasticity| < 1 => raise price until elasticity exceeds 1. |elasticity| = + => P is set by market (not the firm). The firm should choose Q so that P=MC(Q)....
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This note was uploaded on 04/02/2008 for the course ECON 200 taught by Professor Cramer during the Spring '07 term at University of Arizona- Tucson.

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Optimal Price - Marginal Rule (2) Therefore, if the firm is...

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