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Profit Maximization and Hedonic Pricing in Economics

Explore the role of hedonic pricing in profit maximization, comparing conditions with and without hedonics in input and output markets. Understand how quality factors affect output and input decisions for optimal profitability.

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Profit Maximization and Hedonic Pricing in Economics

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  1. Profit Maximization Revisited: Considering the Role of Hedonic Pricing Eduardo Segarra Professor of Agricultural and Applied Economics Texas Tech University

  2. The PROFIT maximization conditions withoutHEDONICS are: VMPx = rx perfect competition in BOTH input and output markets VMPx = rx(1 + Es-1) perfect competition in the output market but NOT in the input market VMPx (1 + Ed-1) = rx perfect competition in the input market but NOT in the output market VMPx (1 + Ed-1) = rx(1 + Es-1) NO perfect competition in BOTH input and output markets

  3. Given Y = f(X), where fx > 0 and fxx <0 Where Y is the level of output produced and X is amount of input used Assuming an “output quality” relation such as Q = g(X), where gx represents the marginal change in quality of output due to a change in the level of input use and assuming Py = w(Y, Q)

  4. The PROFIT maximization conditions withHEDONICS are: VMPx + Y Wqgx= rx perfect competition in BOTH input and output markets VMPx + Y Wqgx= rx(1 + Es-1) perfect competition in the output market but NOT in the input market VMPx (1 + Ed-1) + Y Wqgx= rx perfect competition in the input market but NOT in the output market VMPx (1 + Ed-1) + Y Wqgx= rx(1 + Es-1) NO perfect competition in BOTH Input and output markets These HEDONIC relationships could be extended to the INPUT SIDE ..... This would be the case in which the QUALITY of the INPUT used is acknowledged through its price

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