4 Lecture

4 Lecture - Lecture 4 Total revenue is at maximum when...

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Lecture 4 13:17 Total revenue is at maximum when demand is at unit elastic When price falls revenue rises when demand is elastic When marginal revenue is at 0 total revenue is at maximum change in price will not cause TR to increase or decrease. The relationship between price elasticity and marginal revenue TR = P x Q MR = (technically the slope of total revenue) = dTR/dQ = P (dQ/dQ) + A (dP/dQ) = P +  Q x (dP/dQ) = P ( 1 + Q/P x dP/q ) MR = P ( 1 + 1 / elasticity )
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Decision Making Let MR = P (1 + 1/elasticity) Profit maximization condition requires that MR = MC MC = P (1 + 1/elasticity) P = MC / (1 +1/elasticity) Ex.) %change in Q = 2% % change in P = 1% Elasticity = % change Q/% change in P = -2/1 = -2 Suppose MC = $25 P = 25/ ( 1 – ½ ) = 50$ Netflix demand was elastic, they raised their price and lost income. Determinants of price elasticity
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This note was uploaded on 02/23/2012 for the course 373 421 taught by Professor Sani during the Spring '12 term at Rutgers.

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4 Lecture - Lecture 4 Total revenue is at maximum when...

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