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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.
- Spring '07