Unformatted text preview: puting Arc elasticity requires changing the price and observing the initial and new quantities. In general, the optimal price rule can’t be used to find the optimal price but rather to confirm that a price point is
optimal. For example, with a linear demand curve, depends on but to use optimal rule to find we need to know .
There is however one type of demand model for which one can use the optimal price rule to find the price: the constant
price elasticity demand model. Let’s do an example.
Example: Suppose a company has the demand function
and the cost function ( )
. Use the
optimal price rule to find the optimal price assuming that the optimal quantity falls in one of these scenarios:
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. ⏟ ,
, ⏟ ,
, From the demand...
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This document was uploaded on 01/19/2014.
- Fall '14
- The Land