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Question
From the following information about a firm, find the firm's equilibrium output in terms of marginal cost and marginal revenue. Give reasons. Also, find profit at this output
| Output (units) | Total Revenue (Rs) |
Total Cost (Rs) |
| 1 | 6 | 7 |
| 2 | 12 | 13 |
| 3 | 18 | 17 |
| 4 | 24 | 23 |
| 5 | 30 | 31 |
Solution
The producer’s equilibrium refers to a situation in which he maximises his profits. A producer strikes an equilibrium when two conditions are satisfied:
i. MR = MC
ii. MC is rising or the MC curve cuts the MR curve from below.
| Output (units) |
Total Revenue (Rs) |
Total Cost (Rs) |
Marginal Revenue (Rs) |
Marginal Cost (Rs) |
Profit (TR - TC) |
| 1 | 6 | 7 | - | - | -1 |
| 2 | 12 | 13 | 6 | 6 | -1 |
| 3 | 18 | 17 | 6 | 4 | 1 |
| 4 | 24 | 23 | 6 | 6 | 1 |
| 5 | 30 | 31 | 6 | 8 | -1 |
Here, the firm is in equilibrium at output equal to 4 units i.e. MR= MC and MC start rising after the 4th unit of output.
Equilibrium is not struck when MR > MC. In such a situation, producing an additional unit would add more to TR than to TC. This implies that the gap between TR and TC tends to widen or that profits are still to be maximised. On the other hand, if the firm produces a slightly higher level of output than 4 units, then the firm will face price which falls short of the MC.
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