From the following information about a firm, find the firms 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 | 7 | 8 |
2 | 14 | 15 |
3 | 21 | 21 |
4 | 28 | 28 |
5 | 35 | 36 |
Answer:
Output (units) Total Revenue (Rs.) Total Cost (Rs.) Marginal Revenue (Rs.) Marginal Cost (Rs.) Profits (TS - TC) 1 7 8 - - -1 2 14 15 7 7 -1 3 21 21 7 6 0 4 28 28 7 7 0 5 35 36 7 8 -1 According to the MR-MC approach, the firm (or producer) attains its equilibrium, where the following two necessary and sufficient conditions are fulfilled. 1. MR = MC 2. MC must be rising after the equilibrium level of output. Thus, by looking at the table given above, we can say that the firm is in equilibrium at output equal to 4 units. When output is 4 units, MR = MC (thus, the first condition is satisfied) and MC increases after the \[{{4}^{th}}\] unit of output (therefore, the second condition is satisfied). At output less than 4 units, if the firm produces slightly lesser level of output than 4 units, then the firm is facing price that exceeds the MC. This implies that higher profits can be achieved by increasing the level of output to 4 units. On the other hand, if the firm produces slightly higher level of output than 4 units, then the firms MC exceeds its MR, thereby making profits negative. This implies that higher profits can be achieved by reducing the output level to 4 units. Thus, 4 unit of output is the producer s equilibrium and 4 units of output is the profit maximizing output level, where Price = MC and also MC is rising.
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