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Question
From the following table, find out the level of output at which the producer will be in equilibrium. Give reasons for your answer.
|
Output (units) |
Marginal Revenue Rs |
Marginal Cost Rs |
|
1 |
8 |
10 |
|
2 |
8 |
8 |
|
3 |
8 |
7 |
|
4 |
8 |
8 |
|
5 |
8 |
9 |
Solution
|
Output |
Marginal Revenue |
Marginal Cost |
|
1 |
8 |
10 |
|
2 = A |
8 |
8 |
|
3 |
8 |
7 |
|
4 = B |
8 |
8 |
|
5 |
8 |
9 |
We know that the producer attains equilibrium when the following two conditions are accomplished.
(i) MR=MC
(ii) MC should be rising
As we can see in the given schedule, that the first condition is being met in two cases.
That is at point A and B, MR=MC=8.
However, the second condition is being met only at point B. That is, in contrast to A where MC is falling from 8 to 7, the MC is rising from 8 to 9 at point B. Thus, the producer equilibrium will be at point B or at 4 units output level.
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