Page 85 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx
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The pricing decision
The profit maximisation model
It is worthwhile a firm producing and selling further units where the increase in
revenue gained from the sale of the next unit exceeds the cost of making it (i.e. the
marginal revenue exceeds the marginal cost).
However, if the cost of the next unit outweighs the revenue that could be earned from
it (i.e. the marginal cost exceeds the marginal revenue), production would not be
worthwhile.
A firm should therefore produce units up to the point where the
marginal revenue equals the marginal cost: MR = MC
The basic price equation is given as p = a + bx
p = price x = quantity demanded
b = (change in price/change in quantity) a = maximum price
The marginal revenue equation can be found by doubling the value of b:
MR = a + 2bx
The marginal cost is the variable cost of production.
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