Advanced Pricing - 1 Managerial Economics Kyle Anderson.

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Advanced Pricing - 1 Managerial Economics Kyle Anderson

In order to maximize profits, firms need to set quantity where MR=MC. Pricing Puzzle #1 In order to maximize profits, firms need to set quantity where MR=MC. Firms often mark-up over cost. Is this inconsistent with profit maximizing? Kyle J. Anderson

Mark-up pricing Determining the Profit Maximizing Price: Chain rule: To profit maximize: MR=MC Factor out a P: Kyle J. Anderson

Mark-up Pricing Examples: If MC=$10, and ε= -2, what is profit-max price? If P=100, and ε=-3, what is MC? What if P=$60 and MC = $50? ε = -3 Kyle J. Anderson

Extreme Mark-up Pricing What about perfect competition? ε = -∞ P = MC What if ε=-1? Revenue maximizing Cannot have a profit maximizing mark-up! Only works on elastic portion of demand curve. Kyle J. Anderson

Monopoly pricing $ MC D Q MR Consumer Surplus Firm’s Marginal Profits Deadweight Loss MC D Q MR Kyle J. Anderson