<Dl> <Dd> P = (PED / (1 + PED)) × MC . </Dd> </Dl> <Dd> P = (PED / (1 + PED)) × MC . </Dd> <P> In words, the rule is that the size of the markup is inversely related to the price elasticity of demand for the good . </P> <P> The optimal markup rule also implies that a non-competitive firm will produce on the elastic region of its market demand curve . Marginal cost is positive . The term PED / (1 + PED) would be positive so P> 0 only if PED is between − 1 and − ∞ (that is, if demand is elastic at that level of output). The intuition behind this result is that, if demand is inelastic at some value Q then a decrease in Q would increase P more than proportionately, thereby increasing revenue PQ; since lower Q would also lead to lower total cost, profit would go up due to the combination of increased revenue and decreased cost . Thus Q does not give the highest possible profit . </P>

Use the information about marginal cost (mc) and marginal revenue (mr)