00:01
The erroneous statement posed in this question is something along the lines of the profit maximizing firm will always charge the highest bearable price.
00:08
Now, this is wrong because we have to take a look at not just what this highest price is in terms of, yes, some people will be willing to pay that price, but overall, what is this willingness to buy? so even a monopolist has to be aware of its consumer's willingness to buy its product, because if it starts to charge a price too high, they're going to lose money.
00:32
So we have to take a look at this concept of marginal revenue.
00:36
Now, if the firm's marginal revenue of increasing its price, say it increases its price by $100, but maybe associated with whatever marginal cost it has, maybe it might actually end up losing money.
00:49
Maybe the marginal cost there was $120.
00:50
So at this point, we're seeing marginal revenue would be less than marginal costs, at which point this firm would be losing money...