Total revenue is maximized when MR 0 TR maximizing Q R Profit maximizing Q M TR

Total revenue is maximized when mr 0 tr maximizing q

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=> Total revenue is maximized when MR = 0. -TR-maximizing Q R > Profit-maximizing Q M -TR-maximizing P R < Profit-maximizing P M 4
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Q: Why does Doug Allen think the textbook you’re using is priced too high? (2) What is the profit? “Since a price searcher can freely set its own price, it can always earn positive profit.” True or false? π = TR TC = P×Q AC×Q =( P AC ) ×Q We need to know the average cost. If the price searcher was earning a positive profit, the price of the factor making it a price searcher would have to rise AC increase Profit falls to zero The opposite would happen if the firm was making a loss. In long run equilibrium, a price searcher earns π = 0 (Monopolistic competition equilibrium). (3) Regulation of natural monopoly 5
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- Why regulate? - Price regulation: Option 1 : MC pricing (Socially optimal pricing): Option 2 : AC pricing (Fair-return pricing): 4. Price discrimination 6
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Note: Price searching => DWL: unrealized gains from trade Q: Without any government intervention, what prevents gains from trade from being exploited by the profit- maximizing firm? A: The assumption of charging single price . - If the firm is only allowed to charge one (per unit) price, the gains from trade cannot be exhausted. - If we relax this assumption, by using more complex pricing schemes , the firm can capture more of the gains from trade. (1) Price discrimination What is price discrimination ? - Charging different prices that are not based on cost differences . Is any of these an example of price discrimination? Young drivers pay higher car insurance premium. Men pay higher life insurance premium than women.
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  • Spring '08
  • HANAFIAHHARVEY

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