john hull: >Serious question: If the firm is already charging a profit maximizing price, how can it pass the cost of bathroom maintenance to customers as a whole?<
1. There is no a priori reason to think that either * he is in fact charging a profit-maximizing price, or * he believes that he is charging a profit-maximizing price. The former is the case because he does not know enough about the present, existing array of prices, costs, production/marketing/administration/et many cetera situations of his existing competitors, or about the usual preferences and capacities of those who will be his customers during the relevant period, or about the present capacities and intentions of competitors both immediate and remote. Even if he _wanted_ to charge the p-m p, he would not know what it was. The latter is the case because (even if he is not sophisticated enough to recognize and articulate the uncertainties [and, of course, the risks] involved in the first reason) he knows that he has not even tried to acquire the information necessary to achieve exactly _the_ p-m p. What he does believe is that he is doing well enough, all things considered. 2. A restaurant with pay toilets is, as several have pointed out, not exactly the same good as a restaurant with free toilets. What that difference might be for a particular restaurant is, of course, impossible to know, for the same sorts of reasons as above -- and then some, because in addition to those, he must also reckon, somehow, what _his_ difference will be. He may well, in the exercise of good business judgment, conclude that in the long run the extra cost will (not) pay for itself, in higher revenue per unit or greater number of units, lower overall costs, transformation of customers and/or goods produced, and so on. There is, for reasons already alluded to, no a priori way for him to _know_ that his judgment is correct. On the other hand, there is also no way for him to _know_ a posteriori that his judgment was correct, even if it turns out that his net profits were higher (lower) (unchanged but from a different array of costs and income) -- because _that one thing_ was not the only part of the overall picture which changed (as Loasby says, more than one hypothesis is tested by every business decision). Michael E. Etchison Texas Wholesale Power Report MLE Consulting www.mleconsulting.com 1423 Jackson Road Kerrville, TX 78028 (830) 895-4005
