Chapter Nine: Profit Maximization
Marginal Revenue and Elasticity As derived in the textbook (equation 9.12 on page 253) the relationship between price elasticity of demand (ε) and marginal revenue is: = + ε 1 MR p 1 So, if ε=-2, marginal revenue is equal to half of the price. If ε=-1, marginal revenue is zero. To think about this, consider that when ε=-1, an
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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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