22_ProfitMaximizationPC_ToPost

22_ProfitMaximizationPC_ToPost - "The goal of...

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“The goal of competitors is to prevail, not to preserve competition in the markets.” – George Soros ECON 410 Profit-Maximization (Perfect Competition)
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2 Class 22 - Profit Maximization (PC)
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3 Class 22 - Profit Maximization (PC) - = = , 1 x p p MC L p The percent of the price that is markup should equal 1 divided by the own-price elasticity!
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4 Class 22 - Profit Maximization (PC) = - 1 * 1 p MC L The optimal percentage markup over costs should equal 1/ (1-L)! Profit-maximizing markup
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5 Class 22 - Profit Maximization (PC) Industry Lerner Index Markup Factor Food .26 1.35 Tobacco .76 4.17 Textiles .21 1.27 Apparel .24 1.32 Paper .58 2.38 Printing & publishing .31 1.45 Chemicals .67 3.03 Petroleum .59 2.44 Rubber .43 1.75
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6 Class 22 - Profit Maximization (PC) Lerner Index A firm’s Lerner Index for a product is 1. The percentage of price that is markup. 2. (P-MC)/P, where P is the sales price of the good and MC is the marginal cost. 3. A measure used by economists and regulators to measure market power. 4. For a profit maximizing firm, 1/||, where  is the own- price elasticity of demand.
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7 Class 22 - Profit Maximization (PC)
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Group-Clicker Question(P): Recall the intuitive definition of own-price elasticity is the percent change in quantity demanded given a percent change in price. As more firms enter the market (giving consumers more options), what do you expect to happen to the magnitude of own- price elasticity? 1. It will go up. 2. It will go down. 3. It will stay the same.
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9 Class 11 - Elasticity = V V , % % x p x p For a fixed percentage increase in price… As more firms enter an industry, each firm will face a more elastic demand. In other words, the magnitude of each firm’s own-price elasticity will increase.
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10 Class 22 - Profit Maximization (PC) = - 1 * 1 p MC L Recall L=1/|| Profit-maximizing markup
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11 Class 22 - Profit Maximization (PC)
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12 Class 22 - Profit Maximization (PC)
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13 Class 22 - Profit Maximization (PC)
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14 Class 22 - Profit Maximization (PC)
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15 Class 22 - Profit Maximization (PC)
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16 Class 22 - Profit Maximization (PC)
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17 Class 22 - Profit Maximization (PC)
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18 Class 22 - Profit Maximization (PC)
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19 Class 22 - Profit Maximization (PC) BMC as a Generalized PC Model As the number of firms in an industry increases, causing each firm’s own-price elasticity to become more elastic, the optimal markup over cost will converge to 1. In other words, and the number of firms increases, * p MC
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20 Class 22 - Profit Maximization (PC) d/dq=p(q)+p’(q)q-C'(q)=0 “When a firm is deciding whether to increase its sales volume, it must take into account three conflicting incentives:”
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Class 22 - Profit Maximization (PC) d/dq=p(q)+p’(q)q-C'(q)=0 “When a firm is deciding whether to increase its sales volume, it must take into account three conflicting incentives:” 2. Decreased revenues from a price reduction on existing sales. 1. Increased revenues from additional sales.
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22_ProfitMaximizationPC_ToPost - "The goal of...

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