question_answer

Is a producer in equilibrium under the following situations?

(i) When Marginal Revenue (MR) is greater than Marginal Cost (MC).

(ii) When Marginal Revenue (MR) is equal to Marginal Cost (MC).

Give reasons for your answer.

Answer:

 Producer is said to be in equilibrium when he is earning maximum profits and he has no tendency to change the level of output. Producer's equilibrium under the following Situations: (i) When Marginal Revenue is Greater than Marginal Cost (MR > MC) Under this situation, the producer will not be in equilibrium because at this point, the marginal revenues from the sale of an additional unit exceeds the marginal cost incurred in producing that good. As a result, it will be more profitable for the producer to expand the level of output till MR becomes equal MC and MC exceeds MR beyond the point of equality.                                        (ii) When Marginal Revenue is Equal to Marginal Cost (MR = MC) Under this situation, the producer or firm may or may not be in equilibrium because: As this point of equality of MR and MC, if MC exceeds MR beyond the point of equality, only then the producer will be in equilibrium because MR = MC is necessary but not a sufficient condition of producers' equilibrium. The producer will be in equilibrium only when following two conditions are satisfied simultaneously i.e., MR=MC and MC must cut MR from below.