Thumb Rule of Pricing

722 WordsJan 20, 20133 Pages
10.1 MONOPOLY A Rule of Thumb for Pricing Chapter 10: Market Power: Monopoly and Monopsony We want to translate the condition that marginal revenue should equal marginal cost into a rule of thumb that can be more easily applied in practice. To do this, we first write the expression for marginal revenue: Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e. 9 of 50 10.1 MONOPOLY A Rule of Thumb for Pricing Chapter 10: Market Power: Monopoly and Monopsony Note that the extra revenue from an incremental unit of quantity, ∆(PQ)/∆Q, has two components: 1. Producing one extra unit and selling it at price P brings in revenue (1)(P) = P. 2. But because the firm…show more content…
The elasticity of demand for any one supermarket is often as large as −10. We find P = MC/(1 − 0.1) = MC/(0.9) = (1.11)MC. The manager of a typical supermarket should set prices about 11 percent above marginal cost. Small convenience stores typically charge higher prices because its customers are generally less price sensitive. Because the elasticity of demand for a convenience store is about −5, the markup equation implies that its prices should be about 25 percent above marginal cost. With designer jeans, demand elasticities in the range of −2 to −3 are typical. This means that price should be 50 to 100 percent higher than marginal cost. 29 of 50 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld,
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