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Pastimes : Austrian Economics, a lens on everyday reality
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To: Don Lloyd who wrote (309)11/27/2003 8:44:23 PM
From: Don Lloyd   of 445
 
Secondly, the price that maximizes revenue may be lower than the marginal cost. In this case the price will be set to the higher price to approximate the marginal cost. At this point in time, the accounting cost is merely history, and the marginal cost used is the marginal replacement cost, assuming that replacement is actually intended.

This has all been superceded by reality. Monopoly pricing is being considered here.

Start with the price that maximizes revenue. There is always a companion curve that graphs revenue vs quantity which also produces a revenue maximum at the same point.

This is also the PTOS profit maximizing price if, and only if, marginal costs are zero. The actual profit maximizing price is at the higher price point (lower quantity) where the slope of the revenue vs quantity curve has increased from zero to become equal to the marginal cost.

For a concrete example, if the price/quantity demand curve is effectively linear in the region above the revenue maximizing price, then the profit maximizing price is higher than the revenue maximizing price by 1/2 of the marginal cost.

If the revenue maximizing price was $1 and the marginal cost was $0.10, then the profit maximizing price would be $1.05.

If the marginal cost was $1, the same as the revenue maximizing price, then the profit maximizing price would be $1.50.

Regards, Don
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