Unformatted text preview: function we see that Use the optimal price rule: _________________________________________________________________________________________________
The “optimal price rule” can be re-arranged to yield the “optimal markup rule”:
( ) (
( ( )
) ) Here are some insights we can glean from these two rules9:
Optimal price rule Optimal markup rule
[ 9.1 The Optimal Price Rule Confirms that Profits Cannot be Maximized when
We argued earlier that profits can’t be maximized at any price point where
. Does this result follow from the
optimal price rule? Yes. Here’s an example: suppose
and assume the firm has set the price on the inelastic
portion of the demand curve (i.e. where ). Suppose that currently . The right hand side of the optimal price rule is: This yields a negative price (i.e. the company pays customers to buy goods!). In fact, any
implies an infinite price: 9 will give a negative Note to self: re-write this part. The writing sucks.
76 ECO 204 Chapter 16: Analysis of F...
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