a small portion benefit from a large percentage increase in quantity sold and this generates greater marginal revenue. With that, a rational firm will recognize the value of price effects under an elastic demand function for its products and would avoid increasing prices as the quantity (demand) lost would be amplified due to the elastic demand curve. If the firm is a perfect competitor, where quantity produced and sold has no effect on the market price, then the price elasticity of demand is negative infinity and marginal revenue simply equals the (market-determined) price . Therefore, it is essential to be aware of the elasticity of demand. A monopolist prefers to be on the more elastic end of the demand curve in order to gain a positive marginal revenue. This shows that a monopolist reduces output produced up to the point where marginal revenue is positive. Marginal revenue and Marginal benefit Example 1: Suppose consumers want to buy an additional lipstick. If the consumer is willing to pay $ 50 for this extra lipstick, the marginal income of the purchase is $ 50. However, the more lipsticks consumers have, the less they pay for the next lipstick. This is because as consumers accumulate more and more lipsticks, the benefits of having an additional lipstick will be reduced. Example 2: Suppose customers are considering buying 10 computers. If the marginal income of the 11th computer is $ 2, and the computer company is willing to sell the 11th component to maximize its consumer interest, the company's marginal income is $ 2 and consumers' marginal income is $ 2. Marginal revenue and markup pricing Profit maximization requires that a firm produces where marginal revenue equals marginal costs. Firm managers are unlikely to have complete information concerning their marginal revenue function or their marginal costs. However, the profit maximization conditions can be expressed in a “more easily applicable form”: MR = MC, MR = P(1 + 1/e), MC = P(1 + 1/e), MC = P + P/e, (P − MC)/ P = −1/e. Markup is the difference between price and marginal cost. The formula states that markup as a percentage of price equals the negative (and hence the absolute value) of the inverse of the elasticity of demand. A lower elasticity of demand implies a higher markup at the profit maximising equilibrium. (P − MC)/ P = −1/e is called the Lerner index after