From the following information about a firm, find the firm's 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 | 6 | 7 |
2 | 12 | 13 |
3 | 18 | 17 |
4 | 24 | 23 |
5 | 30 | 31 |
Answer:
Output (units)
Total Revenue (Rs.)
Total Cost (Rs.)
Marginal Revenue (Rs.)
Marginal Cost (Rs.)
Profits (TR-TC)
1
6
7
-
-
-1
2
12
13
6
6
-1
3
18
17
6
4
1
4
24
23
6
6
1
5
30
31
6
8
-1
According to the MR-MC approach, the firm (or producer) will attain its equilibrium in two conditions,
1. MR=MC
2. MC must be rising after the equilibrium level of output. Thus, by looking at the table, we can say that the firm is in equilibrium where output equal to 4 units. When output is 4 units, MR = MC (thus, the first condition is satisfied) and MC increases after the 4th unit of output (therefore, the second condition is satisfied).
When output is 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 firm is facing price that falls short of the MC. This implies that higher profits can be achieved by reducing the output level to 4 units. Thus, only at 4 units of output, the producer will be in equilibrium and the profit maximizing output level, where Price (P) = MC and also MC curve is rising.
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