Q. Explain Mark-up pricing?
In addition to using above methods to conclude a firm's optimal level of output, a firm can also set price to maximise profit. Optimal markup rules are: (P - MC)/P = 1/ -Ep
Or
P = (Ep/ (1 + Ep)) MC
Where MC equals marginal costs and Ep equals price elasticity of demand. Ep is a negative number. So, -Ep is a positive number.
Rule here is that size of the markup is inversely related to price elasticity of demand for a good.