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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 | 8 | 10 |
| 2 | 16 | 18 |
| 3 | 24 | 23 |
| 4 | 32 | 31 |
| 5 | 40 | 41 |
Solution
| Output (units) |
Total Revenue (Rs) |
Total Cost (Rs) |
Marginal Revenue (Rs) |
Marginal Cost (Rs) |
Profit (TR − TC) |
| 1 | 8 | 10 | - | - | -2 |
| 2 | 16 | 18 | 8 | 8 | -2 |
| 3 | 24 | 23 | 8 | 5 | 1 |
| 4 | 32 | 31 | 8 | 8 | 1 |
| 5 | 40 | 41 | 8 | 10 | -1 |
According to the MR–MC approach, the firm reaches equilibrium only when the following conditions are satisfied:
i. MR = MC
ii. MC must be rising after the equilibrium level of output
The firm is in equilibrium at the output level of 4 units, and MC increases after the 4th unit of output. Thus, the firm’s equilibrium level of output to maximise output is MR = MC and MC should be rising at the point of intersection with MR. If there is a decline in the level of output, then the price will exceed the marginal cost. Hence, the firm should increase output to earn high profit. The firm reaches equilibrium only when it produces 4 units of output.
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RELATED QUESTIONS
Define marginal cost.
Why is the short run marginal cost curve ‘U’-shaped?
What do the long run marginal cost and the average cost curves look like?
The following table shows the total cost schedule of a firm. What is the total fixed cost schedule of this firm?
Calculate the TVC, AFC, AVC, SAC and SMC schedules of the firm.
|
L |
TPL |
|
0 |
10 |
|
1 |
30 |
|
2 |
45 |
|
3 |
55 |
|
4 |
70 |
|
5 |
90 |
|
6 |
120 |
The following table gives the total cost schedule of a firm. It is also given that the average fixed cost at four units of output is Rs 5/-. Find the TVC, TFC, AVC, AFC, SAC and SMC schedules of the firm for the corresponding values of output.
|
L |
TPL |
|
1 |
50 |
|
2 |
65 |
|
3 |
75 |
|
4 |
95 |
|
5 |
130 |
|
6 |
185 |
Calculate Total variable cost and Marginal cost from the data given below.
| Output (units) | 0 | 1 | 2 | 3 |
| Total cost | 40 | 60 | 78 | 97 |
Given that the fixed cost is Rs. 30. Calculate TVC and TC from the following data:
| Output (units) | 0 | 1 | 2 | 3 |
| Marginal Cost | 0 | 10 | 15 | 25 |
