Inverse Elasticity Pricing Rule

This can be used to find the profit max price for Monopolists.

MR      = P + Q. ΔP/ ΔQ
= P (1+ Q/P . ΔP/ΔQ)
= P (1 +     1/ PED)
don’t forget PED = Q/P . ΔP/ΔQ)

Profit Max occurs where MR = MC

Therefore P (1 + 1/ PED) = MC
(P-MC) / P            = – 1/ PED

 

Option One MC = $5

Using IEPR

P – 5 / P            =      -1      
-P/ 25 – P

P-5/P               = 25 – P / P

P – 5                = 25 – P
P            = 15
Q             = 5

 

OPTION TWO           MC = $9

P – 9 / P          =             -1
-P / 25-P

P – 9                = 25- P
P = 17
Q = 4

Profit = 17* 4 – (20+ 9*4)
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