Unformatted text preview: ving PMP?
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: (
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
, 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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This document was uploaded on 01/19/2014.
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