The Cost of Unsold Output, the Elasticity of Demand, and Prices
نویسندگان
چکیده
Abstract: When a firm must choose price and output before observing demand and therefore risks unsold output, the standard mark-up rule applies with the elasticity being the elasticity of the average quantity sold with respect to price and marginal cost being the marginal cost of an expected unit sold, computed as the marginal cost of a unit produced divided by the expected fraction of the marginal unit produced that the firm sells. The rule resolves the longstanding puzzle of why increased demand uncertainty causes output to increase with additive uncertainty and decrease with multiplicative uncertainty.
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