You are operating a firm in a perfectly competitive market....

You are operating a firm in a perfectly competitive market. In the short run, you have fixed costs of $30. Your variable costs are given in the following table: Q | TVC 0 | 0 1 | 100 2 | 150 3 | 180 4 | 220 5 | 300 6 | 390 Complete the following table: Market Price | Profit maximizing level of output | Profit $48 | $60 | $75 | $85 |

Transcript

00:01 So if there's one thing that you hopefully know about perfect competition, that optimality is defined by price equals to marginal cost, right? because for the perfectly competitive firm, price is equal to marginal revenue, right? they sell a unit, they get the price, they don't affect the price, so they want to keep selling units up until the price, as long as the price covers their costs.

00:20 So when we have quantity and total variable cost, what i want to use here is to get the marginal cost, right, which is the change in the variable cost.

00:31 So our total variable cost is 0, 100, 150, 180, 220, 300, and 390.

00:45 So the marginal cost of the first unit is 100.

00:48 It increases our variable costs by 100.

00:50 The marginal cost of the second is 50, and then 30, and then 40, and then 80, and then 90.

00:56 Right those will be our marginal costs so now if we have prices we want to set price is equal to 48 60 75 and 85 we can get the quantity in each of these cases right so in this case the quantity is going to be a little bit tricky because now it's not just we want to equate marginal cost with with um price with marginal cost, we also have to check if shutdown is an option.

01:31 So if any cases, if the profit comes out to be less than negative 30, we should just shut down instead and pay the fixed costs.

01:38 But if this was the price, right, the optimal quantity would be four because we want to keep producing up until price is greater, is less than marginal cost, right? so it's worth producing the fourth unit because we only cost us 40, we get 48, but it's not worth producing the fifth unit.

01:55 So similarly at 60, 4 and at 75, again, 4 and at 85, now we want to go to 5, right? because we see that it's worth producing that fifth unit.

02:08 It costs 80 to produce, but we can sell it for 85.

02:11 So let's think about profit.

02:14 Profit is revenue minus cost.

02:16 So the profit here would be 48 times 4 minus 30 minus the top.

02:25 Total variable costs would be 220.

02:28 And this is clearly going to be negative...

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