A Simple markup rule Suppose the elasticity of demand for the firms product iS EF MR=P1+ElEF Setting MR= MC and simplifying yields this simple pricing formula P=[EF/(1+EF×MC The optimal price is a simple markup over relevant costs More elastic the demand, lower markup Less elastic the demand higher markup Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 A Simple Markup Rule • Suppose the elasticity of demand for the firm’s product is EF • MR = P[1 + EF ]/ EF • Setting MR = MC and simplifying yields this simple pricing formula: • P = [EF /(1+ EF )]  MC • The optimal price is a simple markup over relevant costs! • More elastic the demand, lower markup. • Less elastic the demand, higher markup