question_answer

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.