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Unformatted text preview: t we know that: “changed infinitesimally” : then the total change is: so that: For “large” changes this is: Having shown this, we see that if: Notice that as the company lowers price and produces more output (i.e.
the same depends on: ) whether revenues rise, fall, or stay 56
ECO 204 Chapter 16: Analysis of Firms with Market Power (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. |
| | | In plain English:
( ) ( ) )
( ) We can now show why it’s impossible to maximize revenues or profits on any price point on the inelastic portion of the
demand curve. First, revenues: from above, we see that if
, then the firm can earn higher revenues from raising
its price. Next profits: suppose that currently
if the firm raises its prices, revenues rise, and total variable cost
falls or stays the same – either way, profits must increase. This shows that it’s impossible for revenues or profits to be
. We will return to this point after the following section.
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This document was uploaded on 01/19/2014.
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