Chapter Nine: Profit Maximization
Chapter 9: Profit Maximization Profit Maximization The basic assumption here is that firms are profit maximizing. Profit is defined as: Profit = Revenue – Costs Π(q) = R(q) – C(q) To maximize profits, take the derivative of the profit function with respect to q and set this equal to zero.
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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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