question_answer

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.