Question

From the following data, find out the level of output that will give the producer maximum profit (use marginal cost and marginal revenue approach). Give reasons for you answer.

Output (Units)	$1$	$2$	$3$	$4$	$5$
Total Cost (Rs.)	$9$	$17$	$24$	$29$	$36$
Total Revenue (Rs.)	$11$	$20$	$27$	$32$	$35$

Answer 1

Output (Units)	Total Cost (Rs.)	Total Revenue (Rs.)	Marginal Cost (Rs.)	Marginal Revenue (Rs.)
$1$ $2$ $3$ $4$ $5$	$9$ $17$ $24$ $29$ $36$	$11$ $20$ $27$ $32$ $35$	$9$ $8$ $7$ $5$ $7$	$11$ $9$ $7$ $5$ $3$

Producer is in equilibrium at $4th$ unit of output.
A producer strikes equilibrium when two conditions are satisfied:
(i) $MR=MC$, and
(ii) $MC$ is rising from the point of equilibrium (so that MC is greater than MR beyond the equilibrium output).
Condition $1$ is satisfied in two situations: (1) when $3$ units of output are produced, and (2) when $4$ units of output are produced. But situation (1) does not satisfy condition $2$ (that MC should be rising from the point of equilibrium). However, both the conditions of equilibrium are satisfied in situation (2). Hence, equilibrium is struck when $4$ units of output are produced.