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.)
$1$ $2$ $3$ $4$ $5$	$7$ $14$ $21$ $28$ $35$	$8$ $15$ $21$ $28$ $36$

Answer 1

Output (Units)	Total Revenue (Rs.)	Marginal Revenue (Rs.)	Total Cost (Rs.)	Marginal Cost (Rs.)
$1$ $2$ $3$ $4$ $5$	$7$ $14$ $21$ $28$ $35$	$7$ $7$ $7$ $7$ $7$	$8$ $15$ $21$ $28$ $36$	$8$ $7$ $6$ $7$ $8$

In the above table, $MR=MC$ in two situations: (i) when $2$ units of output are produced, and (ii) when $4$ units of output are produced. However, in situation $1$, when output is $2$ units, $MC$ is falling, whereas in situation $2$, when output is $4$ units, $MC$ is rising. A producer strikes equilibrium when two conditions are satisfied:
(i) $MR=MC$, and (ii) $MC$ is rising.
This means that the equilibrium will be struck when $4$ units of output are produced and not when $2$ units of output are produced.
When $4$ units of output are produced, $TR=Rs.28$ and $TC=Rs.28$
$Profit=TR-TC$
$Profit=Rs.28-Rs.28=0$
The producer is earning only normal profits at the point of equilibrium. Normal profits are a part of $TC$.