Question

As a producer, how would you adjust your level of output when $MR$ and $MC$ are not equal? Assume that, price of your product is constant for you, and the law of variable proportions is operative.

Answer 1

Constant price means, $AR$ is constant. If $AR$ is constant, $AR=MR$. Both $AR$ and $MR$ are, therefore, indicated by a horizontal straight line, parallel to X-axis. When the law of variable proportions is operative, $MC$ curve tends to be $U-shaped$ : $MC$ tens to decline corresponding to increasing returns, and it tends to rise corresponding to diminishing returns.
I will strike my equilibrium at a point when:
(i) $MR=MC$, and (ii) $MC$ is rising.
I may face two situations:
(i) $MR>MC$, and (ii) $MR<MC$.
How will I adjust my output?
For me, $MR$ is constant in both the situations. So that the equality between $MR$ and $MC$ will be achieved only through changes in $MC$.
In situation $1$, when $MR>MC$:
I would like to increase the level of output. This world cause increase in $MC$. The process of increasing output is to be continued till $MR=MC$.
In situation $2$, when $MR<MC$:
I would like to decrease the level of output. This would cause decrease in $MC$. The process of decreasing output is to be continued till $MR=MC$.