When does the formula for profit maximization work?

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 is elastic. To see why, imagine that demand is inelastic.

Which is the optimal condition for profit maximization?

Dividing component i of Eq. ( 4.2) by component j yields: which is the familiar condition that the MRTS between any two inputs must equal their price ratio (slope of the isocost line) at the firm’s optimal choice. That is, the firm must choose its (interior) inputs so that its isoquant is tangent to its isocost.

How is short run supply by a profit maximizing firm?

Short Run Supply by a Profit Maximizing Firm For purposes of this section, imagine that a firm is a price taker, that is, it observes the market price and then makes and sells as many as it wants to at that price. In the short run, the firm will have some fixed amount of capital and, as a result, will face some short run marginal cost (SMC) curve.

Which is the inverse of the profit maximization rule?

The Inverse Elasticity Rule and Profit Maximization The inverse elasticity rule is, as above:       = + ε 1 MR p 1 If a firm is profit maximizing, then we know that MR=MC.

How are demand curves and profit maximizing pricing related?

There are two components to a product price p in order to maximize profits: the product’s demand curve D (p). The demand curve D (p) tells you the number of units of the product that will be sold at price p. Once you know the unit cost c and the demand curve D (p), the profit margin corresponding to a particular price p is:

How to maximize profit with derivatives in calculus?

You can use calculus to maximize the total profit equation. Because total revenue and total cost are both expressed as a function of quantity, you determine the profit-maximizing quantity of output by taking the derivative of the total profit equation with respect to quantity,…

How to calculate total revenue using demand equation?

Subtract q from both sides of the equation. Divide both sides of the equation by 200. To determine total revenue, multiply both sides of the demand equation by q. This equation tells you how much total revenue equals given any value for quantity, q. Thus, total revenue is a function of q.