In this topic we consider a firm’s choice of linear price and goods quality.
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Get Help Now!The marginal revenue from an increase in quality, MRY, is the increase in revenue caused by a unit increase in quality:
MRY = = MRY =
- Break even sales when the firm chooses both price and quality
Assume zero incremental fixed cost and cost has the ‘constant returns to scale’ form.
We consider the impact of a change in P accompanied by a change in Y. The change in P and Y causes a change in Q. The change in P and Y will not change profit if:
(P– Y)Q
= (P+DP– Y -DY)(Q+DQ)
or:
0 = (P+DP– Y -DY)DQ +(DP-DY)Q
or:
=
The equation shows us the break even change in sales following a change in price DP and quality DY.
Note DY is an example of a DAVC discussed in topic 5.
- Break even sales when the firm chooses both price and quality
Assume zero incremental fixed cost and cost has the ‘constant returns to scale’ form.
We consider the impact of a change in P accompanied by a change in Y. The change in P and Y causes a change in Q. The change in P and Y will not change profit if:
(P– Y)Q
= (P+DP– Y -DY)(Q+DQ)
or:
0 = (P+DP– Y -DY)DQ +(DP-DY)Q
or:
=
The equation shows us the break even change in sales following a change in price DP and quality DY.
Note DY is an example of a DAVC discussed in topic 5.
- Break even sales when the firm chooses both price and quality
Assume zero incremental fixed cost and cost has the ‘constant returns to scale’ form.
We consider the impact of a change in P accompanied by a change in Y. The change in P and Y causes a change in Q. The change in P and Y will not change profit if:
(P– Y)Q
= (P+DP– Y -DY)(Q+DQ)
or:
0 = (P+DP– Y -DY)DQ +(DP-DY)Q
or:
=
The equation shows us the break even change in sales following a change in price DP and quality DY.
Note DY is an example of a DAVC discussed in topic 5.
Thus the marginal revenue from an increase in quality is:
MRY = Q……………………………………………………..
