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 calculate profit at this output.

Output (Units)	Total Revenue (Rs.)	Total Cost (Rs.)
$1$ $2$ $3$ $4$ $5$	$8$ $16$ $24$ $32$ $40$	$10$ $18$ $23$ $31$ $41$

Answer 1

Output (Units)	Total Revenue (Rs.)	Marginal Revenue (Rs.)	Total Cost (Rs.)	Marginal Cost (Rs.)
$1$ $2$ $3$ $4$ $5$	$8$ $16$ $24$ $32$ $40$	$8$ $8$ $8$ $8$ $8$	$10$ $18$ $23$ $31$ $41$	$10$ $8$ $5$ $8$ $10$

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) $MR=MC$, (ii) $MC$ is rising.
This means that in the above scenario, 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, $TR=Rs.32$ and $TC=Rs.31$
$Profit=TR-TC$
$Profit=Rs.32-Rs.31=Rs.1$
The producer is earning supernormal profit of $Rs.1$ at the point of equilibrium.