ajaz_eco_204_2012_2013_chapter_16_Market_Power

It depends suppose this says that the current price

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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...
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