00:01
Hello everyone and welcome.
00:02
So this question is asking us what a firm should do in a perfectly comparative market.
00:07
So we know the marginal cost at 500 units is a $1 .50.
00:14
The price or the marginal revenue is equal to $1 .25.
00:20
So that's how much each unit sells for.
00:22
And the long run average variable cost is going to be $1.
00:31
So what should the firm do in order to maximize its profits.
00:36
So at first glance, we look at the marginal cost.
00:39
We look at the marginal revenue.
00:40
And since marginal cost is greater than marginal revenue, we might be inclined to say that the firm should just shut down permanently because if it doesn't, then it's going to be making a loss.
00:50
And that's not wrong, but it shouldn't just shut down.
00:52
So let's go through our options and talk it through.
00:55
So the first option, let's write them down, a, b, c, and d.
01:01
So the first option, it says that it should shut down.
01:05
Now, you only want to shut down when your long run profit is negative...