It depends suppose this says that the current price

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ving PMP? 84 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. It turns out the optimal price rule can give us the direction of a price change: whether to raise to lower prices to increase profits. If a business is charging the optimal price then: By contradiction, if the company is charging a suboptimal price, then: needs to know and elasticity method: ( ) and without the demand and/or cost functions. The price elasticity can be calculated from the arc ̅ ̅ The firm can lower (or raise) price slightly, observe the change in output and compute For , one can assume constant returns so that the cost function is linear: () by the arc elasticity formula. () From accounting, note: () Thus, we can approximate by: With , and we can check if the optimal price rule balances: if it does the firm is charging the optimal price and change nothing; if it doesn’t, the firm must either raise or lower prices – what should it do? It depends. Suppose: This says that the current price is too high relat...
View Full Document

This document was uploaded on 01/19/2014.

Ask a homework question - tutors are online