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Question
From the following schedule find out the level of output at which the producer is in equilibrium, using marginal cost and marginal revenue approach. Give reasons for your answer.
|
Price per unit (Rs) |
Output (Units) |
Total Cost (Rs) |
|
8 |
1 |
6 |
|
7 |
2 |
11 |
|
6 |
3 |
15 |
|
5 |
4 |
18 |
|
4 |
5 |
23 |
Solution
|
Price Per Unit (Rs) |
Output (Units) |
Total Cost ( Rs) |
Total Revenue ( Rs) |
Marginal Revenue ( Rs) |
Marginal Cost ( Rs) |
|
(P) |
(Q) |
(TC) |
(TR = P × Q) |
(MRn = TRn–TRn–1) |
(MCn= TCn–TCn–1) |
|
8 |
1 |
6 |
8 (= 8 × 1) |
- |
- |
|
7 |
2 |
11 |
14 (= 7 × 2) |
6 (= 14 – 8) |
5 (= 11 – 6) |
|
6 |
3 |
15 |
18 (= 6 × 3) |
4 (= 18 – 14) |
4 (= 15 – 11) |
|
5 |
4 |
18 |
20 (= 5 × 4) |
2 (= 20 – 18) |
3 (= 18 – 15) |
|
4 |
5 |
23 |
20 (= 4 × 5) |
0 (= 20 – 20) |
As per the MR-MC approach, producer’s equilibrium is attained at that output level where both the following conditions are fulfilled.
1. MR = MC
2. At the point of intersection, MC should be upward sloping(i.e. rising) or the slope of the MC curve is greater than the slope of the MR curve at subsequent output levels beyond the point where MC = MR
In the given schedule, MR = MC at 3 units of output. This implies that the first condition for the producer’s equilibrium is fulfilled. However, at this output level, MC curve is falling, which violates the second condition. Also, as no information beyond 5 units of output is provided in the question, so no further calculations can be done. Thus, in the light of the limited information, for this question, we regard that the producer’s equilibrium is achieved at 3 units of output.
