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Formula for the optimal markup of price over cost

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Reference no: EM132046301

Profit maximizing firms set MR = MC to choose the profit maximizing Q and P;

MR = P [1 + 1/? ]

Suppose MC = 1 and ? = -3. What price should a profit maximizing firm choose?

Suppose MC = 1 and ? = -2. What price should a profit maximizing firm choose?

Why do we want to charge different prices in case (i) and (ii)?

MC is the same for case (i) and (ii) yet the markup of price over cost differs in the two cases.

Solve for P as a function of MC and ?. This will give you a formula for the optimal markup of price over cost.

Reference no: EM132046301

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