In this topic we consider a firm’s choice of linear price and goods quality.

The marginal revenue from an increase in quality, MR_{Y}, is the increase in revenue caused by a unit increase in quality:

MR_{Y }= = MR_{Y }=

__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:

MR_{Y }= Q……………………………………………………..