Chapter Nine: Profit Maximization
Chapter 9 Lecture Notes 4 Example: Imagine that demand is given by q = 80 – 2p. To calculate the marginal revenue function, we need to rewrite this so that price is a function of quantity, or:
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Chapter Nine: Profit Maximization
faculty.metrostate.eduChapter 9 Lecture Notes 7 + = − = − = + = = + = ε ε ε ε ε 1 p MC p 1 p MC p MC p MC 1 MR p 1 MR MC So, if the price elasticity of demand is –2, the profit maximizing price is: 2 MC 1 2 MC 1 2 2 * MC = ⋅ − − = ⋅ − − p = So, the profit maximizing price will be two times the marginal cost. This formula only works if demand ...
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