Question

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 1

Output (units)	Total revenue (Rs)	Total cost(Rs)	Marginal revenue (Rs)	Marginal cost (Rs)	Profit (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 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 4units. When the output is 4units, MR=MC(thus, the first condition is satisfied) and MC increases after the 4th unit of output(thus, the second condition is satisfied).

At output less than 4units, if the firm produce slightly lesser level of output than 4units, then the firm is facing price that exceeds the MC. This implied that higher profits can be achieved by increasing the level of output to 4units. On the other hand, if the firm produces slightly higher level of output than 4units, 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 4units. Thus, only at 4 units of output, the producer will be in equilibrium and the profit maximising output leve, where Price(P)=MC and also MC curve us rising