Principles of Microeconomics / Unit 7 MIC 0608 worked example, 60 to 90 seconds
Profit-Maximizing Quantity from a Cost Table
The idea
From a total cost table and a market price, build the marginal cost column as the difference between rows. Then move down the column: take every unit whose marginal cost is at or below the price, and stop at the first whose marginal cost exceeds it. That last row taken is the quantity. Confirm with totals if the table allows, and remember that a quantity chosen by the rule can still carry a loss.
In practice
Worked example: the strawberry farm's marginal costs are twenty, twelve, ten, twelve, sixteen, twenty, twenty-four and twenty-eight for flats one to eight. At a price of twenty-two dollars, flats one through six each cost no more than twenty-two and the seventh costs twenty-four, so the farm grows six. Revenue is one thirty-two against a cost of one fifty: a loss of eighteen dollars, which beats the sixty-dollar loss of growing nothing.
Where people slip
Two errors. Stopping at the cheapest unit, the third here, because marginal cost is lowest there; the rule stops where marginal cost climbs past the price, not where it bottoms. And treating a loss as proof the quantity is wrong; at twenty-two dollars every quantity loses, and six loses least.
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