1. Advanced Pricing - 1
Managerial Economics
Kyle Anderson

2. 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

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

4. 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

5. 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

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